Contents. IHB at a glance Management 2008 in figures IHB portfolio Revenue by industries Export map Financial highlights

Transcription

1 Annual Report 2008

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3 Contents IHB at a glance Management 2008 in figures IHB portfolio Revenue by industries Export map Financial highlights IHB Operating review CEO s letter Consolidated annual management report 2008 Operating results IHB operating results IHB companies operating results Personnel. Personnel development Financial resources managenet. Used financial instuments. Financial risk management. Description of major risks Important post balance sheet events Important scientific research and developments Foreseen development of the company Changes in the price of the company s shares Shareholding structure as at 31 December 2008 Data about the company s bonds trading IHB Financial Statements Independent Auditor s Report Consolidated Financial Statements Notes to the consolidated financial statements IHB governance Comply or explain report Information about the members of the MB and SB Investor Relations Director s report IHB team IHB companies 3

4 IHB is a public limited company managing investment portfolio of companies from different industries. IHB aims to possess controlling interest over 51%, which gives the opportunity to determine the strategy and to achieve the strategic management of the companies from its portfolio. In partnership with other investors, IHB invests in projects in which it can have significant influence - up to 50%. IHB pursues a permanent optimization of the investment portfolio. As at 2008 the investments are mainly in maritime business - shipbuilding, ship repair, port operations, sea transport, classification and certification, machine building and river cruises. IHB is listed on the highest segment A on the official market of Bulgarian Stock Exchange - Sofia. IHB shares are one of the most liquid positions on the stock exchange and are included in all the Bulgarian indeces and in some indeces of the index families Dow Jones STOXX and Dow Jones Wilshire. 4

5 IHB at a glance IHB at a glance The beginning The company was established in September 1996 as a privatization fund with the objective of participation in the mass privatization process in Bulgaria during In February 1998, Privatization Fund Bulgaria PLC was reorganized as a Holding Company in accordance with the Law of Commerce and was renamed as Industrial Holding Bulgaria PLC /IHB/. The activities IHB s main activities are acquision, evaluation and sales of equity in companies, management of companies in its portfolio, financing its subsidiaries. The capital and shareholders IHB is the fifth privatization fund in terms of size of issued capital in investment bonds and number of shareholders among 81 privatization funds licensed in Bulgaria. The founding capital was BGN and the founders were shareholders. After several capital raisings, as at June 2009 the issued capital of IHB is BGN , distributed in ordinary voting shares with BGN 1 nominal value. As at June 2009 IHB has over natural and 150 legal persons, possessing respectively 17% and 83% from the voting shares. The three biggest shareholders holding over 5% of the voting shares posses 55% and the free float is 45%. The vision IHB is the biggest industrial holding in Bulgaria. IHB continuously supports its subsidiaries to become best performers in their business activities and encourages its employees to improve their individual skills. Due to its prosperous subsidiaries, IHB generates high shareholder value. It is therefore attractive for investors and reflects the sound image of a solid and sustainable company. 5

6 MANAGEMENT Dr. Elena Kirtcheva Mrs. Snejana Hristova Mr. Konstantin Zografov Supervisory Board (SB) DZH AD - Chairman DZH AD is a family company with main activities investments in real estates and securities. The company is the third one out of the biggest shareholders in IHB. In the SB, DZH AD is represented by Ambassador Dr. Elena Kirtcheva 1. Ambassador Dr. Elena Kirtcheva (59) was elected as representative in SB in She has great administrative and managerial experience in state institutions, government and non-government organizations, academic and teaching experience in low and economic fields, big experience in diplomacy - ex-ambassador of Bulgaria in Switzerland, Lichtenstein, Finland and Austria. Awarded with the Grand Decoration of Honour in Gold with Sash for Services to the Republic of Austria. She was member of the First democratic Parlament of Republic of Bulgaria and member of commissions and parlament delegations of Republic of Bulgaria in European Council and Organization for Security and Cooperation in Europe /OSCE/. She graduated law in Sofia University Kliment Ohridski. PhD in Law. Founder, Member of the Board and Secretary General of Vienna Economic Forum. 2. Mrs. Snejana Hristova (59) joined the management team in 2003 when she was elected member of the Managing Board. In July 2003 she was elected independent member of the SB. She has rich experience in the insurance sector and business administration of commercial companies. She graduated Insurance in the Economic Academy D.A. Tzenov in Svishtov. MSc in Economics. 3. Mr. Konstantin Zografov (52) joined the SB in September He has rich experience in business administration in the Ministry of Defense and General Staff of Bulgarian Army, Organization for Security and Cooperation in Europe, commercial companies and international nonprofit organizations. He graduated National Military University Vassil Levski in Veliko Tarnovo, with civil major eastern languages, Staff College G.S. Rakovski in Sofia and Defense and Security policy strategic course in the GCSP, Geneva, Switzerland. Mr. Zografov is Associated Director of AFCEA International and Regional Vice President of AFCEA International for Mediterranean and Black Sea region. Managing Board (MB) 4. Mr. Bojidar Danev (70) has been member of the Managing Board and its Chairman 4 Mr. Bojidar Danev 6

7 Management IHB has a two-tier management system - Managing Board and Supervisory Board since IHB s establishment. Mr. Danev has a great experience in business administration of commercial companies and nongovernment organizations. He graduated the Technical University, Sofia and has a PhD specialization in Germany. MSc in Engineering, PhD in Economics and Senior Research Assistant - second degree. Mr. Danev is Chairman of the Managing Board and Executive Chairman of the Bulgarian Industrial Association. 5. Mrs. Daneta Zheleva (41) - Chief Executive Officer joined the management team of IHB in September 1999 as a representative of Dia Expert EOOD - member of the SB. In July 2003 Mrs. Zheleva was elected member of MB and CEO. She has a 10 year experience as a lawyer in the Sofia Bar Association. She graduated law in Sofia University Kliment Ohridski. MLL in Law. Mrs. Zheleva is member of the National Board of the Bulgarian Industrial Capital Association and of the Managing Board of the Bulgarian Private Ports Association. 6.Georgi Momtchilov (35) is in the management of IHB since 17 February Mr. Momtchilov has big experience in business administration of commercial companies mainly in the finance, banking and insurance field. He has graduated Finance in UNWE, Sofia. Possesses MBA from Buckingham University, UK, where he is making PhD. Mr. Momtchilov is the Chief Executive Officer of ZMM Bulgaria Holding. 7. Mr. Borislav Gavrilov (33) joined the management team of IHB in July He has been working in IHB, Elprom ZEM and Alcomet before that. He has experience in business administration of commercial companies. He graduated economics in Hull University, Great Britain. Economist. 8. Ambassador Boyko Noev (55) joined the management team in March He has rich experience in administration in government institutions - he has been member and deputy-head of the Bulgarian delegations to the CSCE and CFE Vienna negotiations and head of the European Organizations Department, Ambassador to NATO, Belgium and Luxembourg, Minister of Defense in Bulgaria. He graduated International Relations in Moscow Institute for International Relations. Ambassador Boyko Noev is Director of European Program at the Center for Study of Democracy Mrs. Daneta Zheleva Mr. Georgi Momtchilov Mr. Borislav Gavrilov Mr. Boyko Noev 7

8 2008 in figures 2008 in figures 20% Consolidated assets growth 2008 to 2007 Consolidated assets growth 2008 to % Consolidated net assets growth 2008 to % Consolidated total revenue decrease 2008 to % 86% Consolidated net profit decrease 2008 to 2007 Share price decrease for

9 IHB Portfolio IHB portfolio Portfolio IHB is a holding company managing a portfolio of companies. Depending on the share and the possibility for IHB to influence their management, these companies are classified as follows: Subsidiaries (s) - companies controlled by IHB; Associates (a) - in which IHB has significant influence, but not control, over the financial and operating policies; Companies with minority interest /portfolio investments/(pi) - companies over which IHB has no influence. Some of the companies are indirectly controlled by IHB through affiliates (ss) or (as). These companies are owned and/ or controlled by some of IHB subsidiaries. Here are presented IHB subsidiaries and associates with their own subsidiaries. Portfolio structure by industries as at May 31, 2009 Total BGN mln % % % % 5-0.3% Machine building ZMM Bulgaria Holding AD (s) ZMM Sliven AD (ss) Mashstroy PLC (ss) ZMM Nova Zagora AD (ss) Elprom ZEM PLC (ss) Leyarmach AD (ss) Bulcari (ss) Furniture production Avgusta Mebel AD (s) 4 Maritime business Bulyard AD (s) Bulyard Shipbuilding Industry AD (ss) KRZ Port Bourgas AD (s) Odesos PBM AD (a) Maritime Holding AD (s) Bulgarian Register of Shipping AD (ss) VIK Sandvik IHB Design (as) Privat Engineering AD (s) Emona Ltd (ss) Marciana Ltd (ss) Karvuna Ltd (ss) IHB Shipping Co AD (ss) KLVK (s) Odria (ss) Skitia (ss) River cruises Dunav Tours AD (a) Dunav Tours Hotels AD (as) Tourist Company Dunav AD (as) Danube River Navigation AD (as) Ship Company Dunav AD (as) Other Hydro Power Bulgaria AD (s) International Industrial Holding Bulgaria AG (s) 9

10 Revenue by industries Industry Shipbuilding Ship repair Port operatiaons Classification and certification Ship design Maritime transport Machine building including: Metal cutting machines Electric machines Metal casting River cruises Furniture production Other The data presents the operating revenue generated by the companies from IHB portfolio, grouped by industries. The data is from the Financial Statements of the companies as at 31 December of the relevant year and is also shown in the Consolidated Annual Management Report 2008 /page 29/. The other operating revenue is not included. The operating revenue by industries is before elimination of intra group transactions.

11 Revenue by industries Operating revenue as at 31 December /BGN, 000/ IHB Consolidated Operating Revenue /BGN, 000/ The operating revenue of IHB (non consolidated) and ZMM Bulgaria Holding (non consolidated) are not shown above. The consolidated operating revenue of IHB comprises the operating revenues of IHB and its subsidiaries (together referred to as the Group ) and the Group s interest in associates. The basis of consolidation is explained in the Consolidated Financial Statements /page 74/. 11

12 12 Export map

13 Export map Export map of the products and services of IHB companies for

14 Export map 2008 legend Our business Industry Symbols Maritime Business Products/services Companies Shipbuilding Bulyard Shipbuilding Industry EAD Ship repair Bulyard Shipbuilding Industry EAD Port activities Odesos PBM AD, KRZ Port - Bourgas AD Classification and Certification Bulgarian Register of Shipping AD Ship design Vik Sandvik - IHB Design AD Metal - cutting machines ZMM Bulgaria Holding AD, ZMM Sliven AD Mashstroy AD, ZMM Nova Zagora AD Electric machines Elprom ZEM AD Metal casting Leyarmach AD River cruises River cruises Dunav Tours AD, Tourist Company Dunav AD, Dunav Tours Hotels AD Furniture production Furniture production Avgusta Mebel AD Machinebuilding Export 14 Region Countries Europe Albania, Austria, Cyprus, Czech Republic, France, Germany, Greece, Italy, Malta, The Netherlands, Norway, Turkey, Lithuania Poland, Portugal, Romania, Russia, Spain, Sweden, Ukraine, United Kingdom, Ireland, Norway, Kingdom of Belgium, Macedonia, Azerbaijan Central America Panama North America USA Latin and South America Colombia, Peru, Argentina, Belize Middle East Syria, Iran, Israel, Saudi Arabia, Irac Africa Algeria, Egypt, Tunisia, Marocco, Angola Asia India, Thailand, United Arab Emirates, Japan

15 Location map of IHB companies in Bulgaria Bulgaria Location map Rousse Sofia Troyan Shumen Sliven Nova Zagora Varna Bourgas 15

16 Financial highlights Operating revenue /BGN 000/ % 86% 47% 20% change from previous year EBITDA-Financial result from operating activities before amortization and depreciation /BGN 000/ % 275% -60% 37% change from previous year Total assets /BGN 000/ % 100% 12% 80% change from previous year Net assets /BGN 000/ % 73% 13% 103% change from previous year Net profit for the year /BGN 000/ Earnings per share /EPS/ /BGN 000/ 1,60 1,42 1, ,20 1,00 0,80 0, ,34 0,40 0,36 0,31 0,27 0, , % 290% -68% 27% 119% 290% -78% 9% change from previous year change from previous year 16

17 Financial highlights Return on sales revenue /%/ Return on equity /ROE/ /%/ 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 32,45 15,47 7,14 7,55 8, ,00 36,43 35,00 30,00 25,00 20,00 15,00 16,19 10,41 10, ,94 5,00 0, Return on assets /ROA//%/ 25,00 19,19 20,00 15,00 10,00 9,82 5,52 5,00 3,90 3,15 0, Return on invested capital /ROIC/ /%/ 45,00 40,00 35,00 30,00 25,00 20,00 15,00 10,00 5,00 0,00 16,64 41,37 10, , P/S-Price/Sales Ratio ,96 0,82 0,94 0, P/E-Price/earnings per share 35,00 33,09 30,00 25,00 20,00 15,00 13,19 10,00 5,00 6,20 2,54 5,88 0, The given figures are as at 31 December of the respective year as per the audited consolidated financial statements of IHB for the same period, prepared in compliance with IFRS. The net assets and net profit figures exclude minority interests. The indicators are calculated on this basis. 1 BGN = EUR

18 IHB OPERATING

19 REVIEW 19

20 Daneta Zheleva, CEO Ceo`s letter Although influenced by the processes of the global economic crisis 2008 was a good year for IHB companies. The 2008 consolidated income reached BGN thousand, while the consolidated net profit amounted to BGN thousand. Bulgaria did not remain isolated from the processes of recession and deflation in developed western economies. Financial crisis affected the world markets and grew into an overall market crisis. That has an impact across all sectors. The significant slowdown of the economic growth worsened the market and export conditions. The crises led to a sharp drop in share prices on the world capital markets, including the Bulgarian Stock Exchange. Financial institutions have become sensitive to risk which made lending processes rather limited and difficult. This is a precondition for IHB Group to continue its activities in 2009 in a complex and hardly predictable business environment specific for every single company in the group. The crises forced us to take quick decisions, to optimize the started projects and to update the schedules for their implementation. Timely identification of threats and risks in different sectors enabled the management to develop anti-crisis programs and to undertake preventive measures as staff optimization, cost reduction and revision of production efficiency and technological connections in the Group. Certainly, managing business in conditions of maximum cautiousness as most of the companies in the market do, are further delaying the processes of recovery. The market environment in shipbuilding and ship repair is characterized by uncertainty and negative trends. This resulted in de- 20

21 Ceo`s letter crease of the IHB s net profit for 2008 due to the goodwill impairment related to the acquisition of Bulyard Shipbuilding Industry. The prices of some contracts for building new ships have been reduced in line with the global trends, aiming to minimize the risk of cancellation of those contracts. As a result of this, at present, this risk is estimated as relatively low for the contracts with time of delivery by Naturally, new opportunities aroused connected with the decrease in prices of commodities and materials, and the easier access to qualified personnel. Machinery sector companies who work mainly for export, are facing the problem of significant reduction of investment costs worldwide. At the same time these companies are operating within the corporate structure of ZMM Bulgaria Holding which has leading positions in the machinery business and wide base of market presence in the world. The opportunity for internal optimization and redirection of the production and technological tasks between the companies in the group is an additional advantage. The managerial staff relies on the positive effect of the centralized marketing, unification of the products and management of the supplies. Regarding Elprom ZEM, its focus on energy and renewable energy sources, opens up new possibilities and perspectives, even though all conventionalities and difficulties of providing financing for these projects. By chartering a 10,000 DWT multipurpose vessel Emona, in 2009 IHB Group started new maritime transport business.. At the end of the year one more vessel of this kind as well as a DWT bulk carrier are expected to enter into service. Even in conditions of goods flow decrease and relatively low freight market, the exploitation of these vessels will positively affect both the revenue from sales and long-term profitability of the company. Dear Shareholders, As market players the IHB companies are currently facing crisis circumstances, while the management and the whole team are challenged to lead the companies through the difficulties of the recession, succeeding to keep the investors interests, the human potential, the competitiveness and the reputation in the markets where we operate. In all cases, the realization of this objective will be connected more or less with unpopular measures and the recovery period will be hard and long. That is why I rely that all stakeholders will join efforts to keep IHB position as one of the largest industrial groups in Bulgaria. 21

22 Consolidated annual management report of Industrial Holding Bulgaria PLC for 2008 Dear Shareholders, 2008 was a dynamic year for the economic life, over which events developed rapidly in various directions. From indications of world inflation till the middle of the year when oil prices reached record-breaking rates of some USD 150 per barrel and raw materials prices reached unparalleled high rates, the corporate world ended the year in the conditions of unprecedented falls oil price of some USD 45 per barrel or a fall of 70%, a fall in raw materials prices of 50% and inflation risk. Capital markets were influenced by the negative news continuously coming out of the banking segment on bad debts, losses and even bankrupts suffered by colossal banking institutions. All world indices reported unprecedented falls ranging between 35% and 80%, having negative rates at the end of the year. The expectations of many analysts that the US crisis would not reach Europe turned out to be wrong. At the end of the year, there was a fall in consumption and many world companies reported sizable fall in the number of orders and income. This trend has been established as to the Bulgarian companies as well. IHB and the group companies have been influenced by the world trends as well. In September, the management of IHB assigned the companies facing potential crisis risk with the preparation of crisis action plans. In November, such plans were already in process of implementation. The companies involved in the production of metal cutting machines experienced delay in orders and fall in production in November. Under the crisis action plans, measures to reduce production costs and optimize the personnel were undertaken. The 2008 financial results of IHB are as follows: The income of IHB, on consolidated basis, decreased by 12% compared to The assets of IHB, on consolidated basis, increased by 20% compared to The net assets increased by 6% compared to The net profit, on consolidated basis, amounts to BGN thousand, i. e. it decreased by 3% compared to In unison with the falls in the capital markets, the shares of IHB reported a fall of 85.89% compared to the falls of SOFIX and BG40 indices % and BG %. The high liquidity and free float of the Company are among the reasons for this fall operating results IHB Group consolidated financial results The 2008 consolidated income of IHB amounts to BGN thousand, reporting a decrease of 11.65% compared to the 2007 consolidated income /BGN thousand/. The operating income is BGN thousand compared to BGN thousand in 2007, reporting a decrease of 9.82%. It includes: 22

23 Consolidated annual management report In BGN thousand Sale of finished production Shipbuilding Sale of services Ship repair Port operations Sales of goods and materials Total The key reason for the decrease in the 2008 consolidated income is the elimination of income from completed stages of the building of ships with construction No 289, No 458 and No 288 ordered by Group companies in the income statement as at 31 December This income of BGN thousand of Bulyard Shipbuilding Industry is not included, while the recognized expense is reported in the item of capital expenses for construction of own assets in economic way, amounting to the total of BGN thousand as at 31 December 2008 compared to BGN thousand in The other operating income, on consolidated basis, amounts to BGN thousand compared to BGN thousand in It includes gains on sales of non-current assets of BGN thousand compared to BGN thousand in 2007 and other income of BGN thousand compared to BGN thousand in The 2008 consolidated net profit, excluding minority interest, amounts to BGN thousand compared to BGN thousand in 2007, reporting a decrease of 2.81%. The key reason is the positive goodwill impairment of BGN thousand. As at 31 December 2008, the Company made a test for impairment of the available goodwill amounting to BGN thousand, the major portion of which /BGN thousand/ is due to the acquisition of Bulyard Shipbuilding Industry. The made analysis is based on the values of assets in use and covers a five-year period. The calculations are based on the financial budgets approved by the management of Bulyard Shipbuilding Industry. A discount rate of 13.6% was applied as to each year included in the projection. IHB operating results Organizational changes in the group. Portfolio restructuring In 2008, no organizational changes or portfolio restructuring occurred. Only changes resulting from the IHB increased investments in the maritime business occurred - establishment of new companies and increased interests in two subsidiaries. The portfolio segment structure changed: Privat Engineering and KLVK, belonging to the Other Sector in 2007, moved to the Maritime Business Sector - maritime transport in Newly established companies IHB started to invest in the building of two new DWT ships - Future 56Type at Bulyard Shipbuilding Industry AD, having a total value of EUR 60 million. The investment is financed through KLVK, a subsidi- 23

24 ary of IHB. The ships have construction No 102 and No 105 and their building is realized through two new subsidiaries of KLVK Odriya Ltd and Skitiya Ltd, established for the purpose. The ships are to be delivered in May 2011 and Graphs 1-2: Structure of the IHB portfolio as at 31 December of the last 2 years 2008 portfolio structure. Investments: BGN thousand Increase in the interests in some portfolio companies In June and November, two contributions totalling BGN thousand to increase the capital of KLVK and two contributions totalling BGN thousand to increase the capital of Privat Engineering were made. The shares of the capital increases were subscribed by IHB. The raised funds are intended to finance the building of new ships of IHB with construction No 288, No 289 and No 458, which are in process of building through Emona Ltd., Marciana Ltd. and Karvuna Ltd., subsidiaries of Privat Engineering and No 102 and No 105, which are in process of building through Odriya Ltd. and Skitiya Ltd., subsidiaries of KLVK. The total funds directly invested by IHB /unconsolidated/ in corporate securities in 2008 amount to BGN thousand. The IHB portfolio as at 31 December 2008, directly and through related parties, is formed of 31 companies: 9 subsidiaries, 3 associates and 19 subsidiaries of subsidiaries and associates. The direct investments of IHB in corporate securities amounted to BGN thousand at the end of the year Maritime business % 2 Machine building % 3 Furniture production % 4 River cruises % 5 Other - 0.3% 24

25 Consolidated annual management report 2007 portfolio structure. Investments: BGN thousand Maritime business % 2 Machine building % 3 Furniture production % 4 River cruises % 5 Other % Management of the subsidiaries Pursuing the tasks set at the beginning of the year with respect to its subsidiaries, in 2008 as well, IHB participated actively in the strategic planning of the business of the subsidiaries. IHB encouraged and assisted in the following: carrying out of investment activities; improvement of their products and services, development and introduction in production of new products and services, depending on market requirements; enhancement of the marketing activities, the human resources management activities, as well as other activities related to the companies management; provision of funds for the operating and investment activities of the companies; analysis and assessment of the possibilities for utilizing the new Internet technologies. Participating in the process of business planning and control over the results achieved Realizing the important role of control in the management of the subsidiaries, the Management of IHB continued applying its practice of business planning and monitoring results. The Management of IHB set strategic goals and results, which each company had to achieve in Each of the executive directors had a personal business task for the year, related to the priorities of the company s activities. 25

26 Information is exchanged on monthly basis. 3 work meetings are held per year among the Management of the Holding and the respective management teams of the companies, at which the results from the past quarter are reported. At the meetings, the results for the reporting period are discussed, the difficulties faced by the management teams of the companies are shared and the possibilities for resolving the problems are analyzed. The direct result of the management of the subsidiaries is the dividend received upon distribution of their profits. Providing support in the financing of the subsidiaries. Information about transactions IHB supports the financing of the group companies by granting loans and assistance in the negotiations on financing by banks. In 2008, loans of the total amount of BGN thousand were granted to subsidiaries and BGN thousand was repaid. The receivables on loans granted to subsidiaries as at 31 December 2008 amount to BGN thousand compared to BGN 60 thousand in Further information is given hereinafter. The 2008 collaterals provided by IHB are in the form of blocked cash and avals of promissory notes. In 2008, the subsidiaries of IHB financed their operations through bank loans granted by Allianz Bank Bulgaria AD, DSK Bank EAD, Raiffeisenbank - Bulgaria AD and United Bulgarian Bank AD. The interests agreed on the loans utilized by the subsidiaries vary between EUROLIBOR + an addition of 2.3% to 3.5% for loans in EUR and basic interest rate + an addition of 2.7% to 4.98%. Teams of IHB assist in the development of the business plans of the subsidiaries required by the banks as substantiation for loan granting. In 2008, IHB concluded no other material transactions except for the investments in subsidiaries and agreements on financing of subsidiaries. The 2008 related party transactions represent granting of loans by IHB to the group companies and vice versa, interest income and interest expenses, loans repayment by the companies to IHB and vice versa, income from sale of services and capital increase contributions. The transactions executed over the period are characterized by no extraordinary circumstances or deviation from market conditions. Information about the transactions between IHB and related parties executed over the year is given in Item 25. Related party transactions of the Notes to the Financial Statements as at 31 December 2008, where the transaction values and types of relation are indicated. No other offers for conclusion of such transactions or transactions out of the usual operations or deviating from the market conditions, to which IHB or a subsidiary of IHB is a party, were made. The loans granted by IHB to its companies and vice versa in 2008 are in BGN with interest rates within the range of 6% - 8%, in EUR with interest rate of 4% - 8% and in USD with interest rate of 5.5%. 26

27 Consolidated annual management report There are no 2008 events or indicators of unusual nature to IHB, having material impact on its operations. The guarantees for liabilities of related parties provided by IHB as at 31 December 2008 are as follows: In favour of DSK Bank EAD: IHB ensured the issue of bank guarantees at the amount of EUR 671 thousand to secure liabilities of Elprom ZEM to a client. The total amount of valid bank guarantees at the end of 2008 is EUR 268 thousand. A contract was signed with DSK Bank EAD for credit limit for issue of bank guarantees, letters of credit and working capital financing of IHB and/or its group companies at the total of BGN thousand. As at 31 December 2008, bank guarantees for BGN thousand and three letters of credit for BGN thousand to Bulyard Shipbuilding Industry were issued for the credit limit. The two contracts with DSK Bank EAD are secured with pledge of the business enterprise of KRZ Port Bourgas AD, a subsidiary of the Holding. Internal control system The Internal Control Unit of IHB reviews the operations and finances of the IHB group. In 2009, Audit Committee is to be elected as a body assisting the Supervisory Board. 27

28 Maritime Shipbuilding, Ship repair & Ship design Bulyard /s/ Bulyard Shipbuilding Industry /ss/ Vik-Sandvik-IHB design /as/ MARITIME BUSINESS Port activities Shipping KRZ Port - Bourgas /s/ Privat Engineering /s/ Odessoss PBM /as/ Karvuna /ss/ Marciana /ss/ Classification & Certification Maritime Holding /s/ Bulgarian Register of Shipping /ss/

29 IHB companies` operating results Generally, maritime business includes the following segments: shipbuilding, ship repair, port operations, classification and certification, maritime transport and ship design. business Emona /ss/ IHB Shipping Co /ss/ KLVK /s/ Odria /ss/ Skitia /ss/ 29

30 Shipbuilding and ship repair Mrs. Ivelina Mancheva Chief Executive, Bulyard Shipbuilding Industry For Bulyard SI 2008 ended with a slight decrease in the income from newbuilding orders which was compensated with increased income from ship repair. However, what began in 2008 as a credit squeeze and then evolved into a banking crisis which was fi nally aggravated by a full-blown economic recession strongly impacted the shipbuilding market and fairly strong ordering activity until 3rd quarter of 2008 was in stark contrast to extremely poor 4th quarter of As a result in 2009 Bulyard SI EAD s main challenges will be concentrated in the following areas: - banks fi nancing - clauses such as Loan-to-Value will make banks reluctant to fi nance new ships delivery; - excess supply shipping is a volatile and cyclical business with its regular market peaks and troughs, thus bringing order cancellations or delays practically all market segments will be affected, while most strongly those which are considered as over-order to which Europe will be less exposed compared to Japan, Korea and China; - exchange-rate turbulences will provide an additional element of uncertainty; - steel and other material prices will be on decrease, however, the steel price gap between Europe and anywhere else in the world might remain critical; - decrease of all expenses. Shipbuilding and ship repair The analysis of the fluctuations of BDI (Baltic Exchange Dry Index) in 2008, the index covering dry bulk shipping, reported a fall to dramatically low rates in December This strongly affected the orders for new ships worldwide and resulted in renegotiation of the prices of orders in process of performance and cancelled orders that led to fall in the market end prices of new ships. The more difficult access to financing by banks is another factor negatively affecting companies. A positive aspect of the crisis is the possible reduction of the prices of materials and equipment and hiring of workers and employees discharged from other segments or companies operating in the same segment from Bulgaria and abroad. Until the beginning of the crisis, the bulk cargo ships were the most demanded ones and formed 70% of all concluded contracts. 30% of the latter is for multi-purpose ships. In consideration of the maritime business stagnation and the increasing requirements to ships safety in short-term aspect, a growth in the demand for new ships is expected following stabilization of the credit policy in the financial segment. The trend of purchase of second-hand ships would preserve only in case of permanent deepening of the financial segment crisis and not due to lack of production capacities for new ships building. The trend of demand for supplying and special-purpose ships is preserved at relatively stable market prices. 30

31 Consolidated annual management report Bulyard AD and its subsidiary Bulyard Shipbuilding Industry EAD The activity of Bulyard is related to the management of its subsidiary Bulyard Shipbuilding Industry EAD. The 2008 income of Bulyard AD amounts to BGN 185 thousand, including financial income /income from interests and foreign exchange gains/ amounting to BGN 122 thousand and other income amounting to BGN 63 thousand. The 2008 expenses of Bulyard total BGN 274 thousand, including operating expenses amounting to BGN 185 thousand and financial expenses amounting to BGN 89 thousand. The 2008 financial result of Bulyard AD is a loss of BGN 89 thousand. The assets of Bulyard as at 31 December 2008 total BGN thousand, the major portion of which represents investments in the subsidiary Bulyard Shipbuilding Industry - BGN thousand. The equity of Bulyard amounts to BGN thousand, including share capital /BGN thousand/, general reserves /BGN 21 thousand/ and retained profit /BGN 18 thousand/. Bulyard has contingent liabilities relating to issue of guarantees and avals of promissory note to Bulyard Shipbuilding Industry EAD under shipbuilding contracts. As at 31 December 2008, Bulyard AD provided banks with avals of promissory notes totalling EUR thousand and USD thousand. Financial results of Bulyard /unconsolidated/ Operating income Profit after Taxes BGN` Other operating income Profit after taxes BGN`000 (0) (20) (40) (60) (80) (100) (2) (35) (89)

32 Bulyard Shipbuilding Industry EAD The core activity of Bulyard Shipbuilding Industry includes shipbuilding and construction of all types of floating facilities, ship repair and ship reconstruction. The company designs, builds and repair ships of up to dwt. Over 850 ships for owners from 27 countries have been built over the 100-year history of the shipyard. The portfolio of products of the Company includes tankers, chemicals and containers vessels, bulk cargo ships, general cargo ships, coals vessels and multi-purpose ships. In 2008, Bulyard Shipbuilding Industry undertook a number of particular actions to create strong features and reduce the weak features of the company, undertake preventive measures to minimize the negative effect of the environment threats and to maximally use its capacities. In 2008, Bulyard Shipbuilding Industry fulfilled its obligations under the contracts signed with Navigation Maritime Bulgare, Aker Tulceà and SOLSTAD. Structures with total weight of tons were produced for Aker Tulcea. Ship with construction No 515 /Hemous multi-purpose ship/ was delivered to Navigation Maritime Bulgare and hull with construction No 190 was delivered to SOLSTAD. In 2008, keels of construction sites No 101, No 289, No 458 and No 459 were placed and site with construction No 288 was commissioned. In the reporting year, the building of the first ship of the Future-56 series (site 101), characterized by a high quality of building technology and meeting the requirements of the international conventions, commenced. In November, the prices of the supplies of sheet iron for sites No 101, No 102 and No 103 were renegotiated, which partially compensated for the sudden fall in the price of sheet iron. At present, the prices of the basic materials and equipment to be supplied under current orders of the company are in process of renegotiation. A number of internal procedures and rules on control of the process of negotiations with business partners, hiring subcontractors, etc., were introduced. With a view to activity optimization, the management structure of the dockyard was changed through interrelations analysis with the purpose of reduction and optimization of the vertical and horizontal internal information flows. The key managerial positions were assigned to persons having the relevant professional knowledge and experience to perform their duties. The living and labour conditions were improved, including the building of a container settlement with capacity of 400 persons, reconstruction of a public building with capacity of 1650 persons, reconstruction of a main meals unit with capacity of 1650 persons, purchase of computer equipment, purchase of necessary specialized software, etc. Events relating to the enhancement of the qualification and educational levels of the hired workers and employees were held. In 2008, Bulyard Shipbuilding Industry EAD was awarded financing of the Project for Increase in Employees Labour Efficiency and Promotion of the Development of Bulyard Shipbuilding Industry EAD under Human Resources Development Operating Programme. The purpose of the Project is to enhance and increase the qualification, capacity and labour efficiency of the employees of the company with the purpose of achieving higher competitiveness of the company in the domestic and international markets. The main training types are professional qualification, training for obtaining key competencies and language education. Training organizations under the Project are Klevman Consultancy Company, Berlitz Language Centre and the Vocational Training Centre at the company. The total number of participating workers, employees and managers is 204 and the project implementation period is 9 months. The 2008 investment program is for EUR thousand / BGN thousand/. There have been implemented key projects for production capacity increase, working conditions improvement and production process modernization, including a license contract with Mitsubishi for building of ton ships, plasma cutting machines, reconstruction of an 800-ton crane under the energy efficiency program partially financed by the Europe Development Bank, reconstruction of an administrative building, purchase of manual instruments and accessories for welding equipment, certification under ISO , and reconstruction of K1 workshop. The total expenses on investments amount to EUR thousand /BGN thousand/, including expenses on repair and maintenance totalling EUR thousand /BGN thousand/. The implementation of the 2008 investment program was financed through investment credits granted by MKB Unionbank AD and own funds. Against the deepening global financial crisis whose summit is expected to be in the middle of 2009, the company has no cancelled contracts or orders at present. There are client enquiries for new building. The aim of Bulyard Shipbuilding Industry is to build series of ships with slight modifications, which is evidenced by the purchased license rights for the building of 8 ships of the Future-56 series. The acquisition of the project makes Bulyard Shipbuilding Industry more competitive in the market through the offering of better price/useful load ratio. This allows reduction of expenses through production planning and flexible production processes and supplies management. 32

33 Consolidated annual management report Bulyard Shipbuilding Industry has signed contracts for orders, which are in process of performance at present and have longer periods. There is a risk of changes in the prices of the shipbuilding contracts and/or their cancellation but it is assessed as relatively low as to the ships with delivery periods by 2010 inclusive. The 2008 net sales income amounts to BGN thousand, including income from shipbuilding amounting to BGN thousand, income from ship repair amounting to BGN thousand and other income amounting to BGN thousand. In 2007, the income amounted to BGN thousand, including income from shipbuilding amounting to BGN thousand, income from ship repair amounting to BGN thousand and other income amounting to BGN thousand. In 2008, there was a decrease in the income from the building of new ships due to the delayed building of sites No 288 and No 289 as a result of repeated delay in the supply of main engine/s on behalf of the producer. The increased income from ship repair compensated for the decrease. In 2008, 9 repairs of vessels owned by foreign persons totalling BGN thousand and 6 repairs totalling BGN 616 thousand for Bulgarian ship owners were made. As at 31 December 2008, site No 288 was at a completion stage, site No 289 was at a stage of active pre-stocks assembly, pre-stocks keels for sites No 459 and No 101 were placed, while all other sites were at uncompleted building stages and no income under these contracts was recognized respectively. The 2008 financial result of the Company is a profit before taxes of BGN 81 thousand or a net profit of BGN 72 thousand. Financial results of Bulyard Shipbuilding Industry /from all activities shipbuilding and ship repair/ Operating income Profit after Taxes BGN` Other income Sales income Profit after taxes BGN`

34 Port operations Mr. Vesselin Statev Ghief Executive, KRZ Port - Bourgas The strong start of port activities in 2007 and the very successful 2008 make our business level outstanding. Practically our result has reached up to the maximum of our port capacity. For 2009 we are aiming at keeping the results at the level of previous year. KRZ Port - Bourgas AD, Odessoss PBM AD The IHB Group has two ports of regional importance located in Varna and Bourgas - Odessoss PBM and KRZ Port - Bourgas. Both ports have certificates for procession of general, liquid and bulk cargo. At present, the decrease in the cargo flow worldwide affects port operations as well. The first indicators of fall in the markets of the IHB Group ports appeared in March 2009 for KRZ Port-Bourgas and in December for Odessoss PBM. The trends accompanying the business depend on the overall macroeconomic environment. As the two ports handle mainly metals and grain cargo, the 2009 results will depend on the grain crop as the metals market has shrunk by over 90% compared to

35 Consolidated annual management report KRZ Port - Bourgas AD The scope of activity of KRZ Port-Bourgas includes port services loading and unloading and warehouse services, transport and forwarding services, ancillary services - provision of electric power, water and bunkering, acceptance of waste, rent of hoisting and hauling machines, inventories, mooring, rent of quay, etc. In 2008, freight of tons was processed compared to tons in The 2008 income of the company amounts to BGN thousand compared to BGN thousand in In 2008, the company realized income from port operations amounting to BGN thousand and other income amounting to BGN 265 thousand. The profit before taxes amounts to BGN 968 thousand and the net profit amounts to BGN 878 thousand compared to BGN thousand in In 2007, KRZ Port-Bourgas also made ship repairs and a portion of the 2007 profit is formed from this activity, while the other portion includes gains on the sale of a non-current tangible asset - a floating dock sold as a result of suspension of ship repairs at the company. The main portion of the 2008 profit represents gains on port operations. In 2008, KRZ Port-Bourgas created new production capacities for port operations. A railway ramp, lines, ton travelling bridge cranes, an inner servicing road, open warehouse facilities and others were commissioned in Tractors, trailers, a motor truck and other equipment were purchased. The 2009 policy focuses on ensuring new freight flows and attracting new clients. A fall in the freight turnover is expected and the management expects processed freight to reach tons. There are plans for construction of new open and sheltered warehouse facilities, asphalting and purchase of equipment. The Project for extension and modernization of the port terminal at KRZ Port-Bourgas, the value of which is BGN 23 million, was approved by the Expert Joint Council. Its approval by the Minister for Regional Development and Public Works and the Minister for Transport is expected. Financial results of KRZ Port-Bourgas Operating income Profit after Taxes BGN` BGN` Other operating income Sales income Profit after taxes

36 Odessoss PBM AD The 2008 total income of Odessoss PBM amounts to BGN thousand, reporting a growth of BGN 286 thousand compared to The 2008 operating income amounts to BGN thousand. The growth is the result of the increased income from port operations. In 2008, freight of tons was processed compared to tons in The 2008 profit before taxes amounts to BGN 142 thousand and the net profit amounts to BGN 124 thousand compared to BGN 240 thousand in In 2008, the company made investments for creation of proper conditions and increase in the freight flow through quay amounting to BGN 521 thousand; expansion of operations and the possibilities for freight storage and procession, expansion of the scope of offered services through commissioning of a 32-ton travelling bridge crane at the rear and possibility for general freight procession onto/down wagons, construction of distant working facilities at the customs and waits for commissioning permit at present. The company intends to perform rear procession of full 20- and 40-foot containers, including refrigerator, and bonded storage regime. In 2009, the company is going to expand the range of freight, increase the level of quay wall use and create new services, including processions of bulk grain freight /wheat, maize and sunflower/ under the scenarios of warehouse-ship and truck-ship. Financial results of Odessoss PBM Operating income Profit after Taxes BGN` BGN` Income 200 Other operating income Profit after taxes

37 Consolidated annual management report Classification and certification Mr. Vladimir Feldmanov Ghief Executive, Bugarian Register of Shipping The Rules of the classifi cation societies are the tools by means of which they perform their main activity classifi cation and certifi cation. In 2008, Bulgarian Register of Shipping has updated its own set of Rules in compliance with the requirements of the international maritime organizations and national standards. The introduction of the new Rules has improved the quality of the services provided by BRS, which is a pre-requisite for overcoming of the diffi culties imposed by the world crisis. Maritime Holding AD and its subsidiary Bulgarian Register of Shipping AD The classification and certification of vessels depend on navigation intensity and shipbuilding and ship repair development. As these segments are characterized by fall observed at present and expected to be present in the following year, the classification and certification of newly built and repaired ships are expected to report a fall as well. The technical and regulatory requirements of the World Maritime Organization and the national maritime administrations have a material effect as well. The introduction of new higher requirements to navigation security and safety is a prerequisite for business keeping, imposing higher requirements and responsibilities as to the register organizations. At the same time, the higher requirements and age of the ship fleet and the pursuit of expenses reduction under the financial crisis conditions orient smaller ship owners to registers of the BRS category. 37

38 Maritime Holding AD and its 100% subsidiary Bulgarian Register of Shipping AD The 2008 activity of Maritime Holding AD is the management of investments in subsidiaries. Maritime Holding holds 99.81% of the capital of Bulgarian Register of Shipping AD - Varna and 100% of the capital of Bulgarian Lloyd EOOD. In 2008, Maritime Holding realized income from dividends amounting to BGN 902 thousand compared to BGN 699 thousand in The income from dividends was received from its subsidiary Bulgarian Register of Shipping AD. The 2008 expenses of the company total BGN 3 thousand as in They represent Financial results of Maritime Holding BGN` Operating income Bulgarian Register of Shipping AD expenses on hired services. The 2008 financial result of Maritime Holding is profit of BGN 899 thousand, which is equal to the net profit, compared to net profit of BGN 696 thousand in The amount of the assets of Maritime Holding as at 31 December 2008 is BGN thousand, the highest share being occupied by investments in subsidiaries - BGN thousand. BGN` Other income 400 Operating income 200 Profit after taxes 0 Profit after Taxes In 2008, the company performed its activity in a highly competitive environment and implemented the program for preparation for audit and certification of BRS as an authorized European classification organization by EMSA. In the last quarter of 2008, the financial crisis materially affected the maritime transport segment and this, along with the leading-off of some of the ships of Navigation Maritime Bulgare, affected the activity of the company and placed it in an unfavourable market position. This directed the efforts to preservation of the market share and existing clients and search for new opportunities and market niches. BRS continued to maintain and develop its relations with the Maritime Administration Executive Agency in respect to cooperation relating to conventional inspections of vessels and applied active policy for partnership with other maritime administrations. In 2008, BRS accounted for 147 Bulgarian and 90 foreign ships, which were certified. The class issued by BRS to the ships owned by Navigation Maritime Bulgare preserved. In Financial results of Bulgarian Register of Shipping Operating income BGN` , BRS class was issued to 25 ships of foreign owners. The process of attraction of ships owned by foreign persons will continue under the conditions of higher requirements to the age and technical conditions of the ships applying for BRS class. In 2008, agency contracts were signed in Syria and China and new shipbuilding supervision contracts were signed with Topsale OOD and Bourgas Shipyard AD. New organizational structure and management scheme meeting the requirements of EMSA were introduced. In this relation, the quality procedures were revised. The increase in efficiency and quality of the offered services is achieved through perfection of skills, enhancement of qualification and introduction of new internet-based information system. In 2008, the budget business indicators were achieved. BRS gained operating income of BGN thousand and other income of BGN 10 thousand. The 2008 profit of the company before taxes amounts to BGN thousand and the net profit amounts to BGN 950 thousand compared to BGN 973 thousand in BGN` Other income 920 Operating income 900 Profit after taxes 880 Profit after Taxes

39 Consolidated annual management report Ship design Mr. Boyko Georgiev Chief Executive, VIK Sandvik-IHB Design We achieved our goals for 2008 to strengthen our position in the market and to become a preferable partner to shipyards and ship owners. Unfortunately, the world economic crises stopped the development of the maritime business at the moment. For this and next year our main goal will be to decrease expenses and to stay on the market in order to be ready for the next upswing of the ship industry. VIK Sandvik - IHB Design AD /since July 2009 Wartsila IHB Ship Design Bulgaria AD/ The company focuses its activity on design of ships and ship structures, development of working documentation and exercising of author s control. The 2008 income of the company amounts to BGN thousand compared to BGN 550 thousand in 2007 when the company was registered and operated for four months. The 2008 financial result is a profit of BGN 459 thousand. The 2009 objectives include expansion of the range of ship design services, ensuring sufficient work to keep the personnel and stabilization and strengthening of the positions in the international market in such services. Financial results of VIK Sandvik - IHB Design Operating income Profit after Taxes BGN` BGN` Operating income 150 Profit after taxes

40 Maritime transport Privat Engineering AD, KLVK AD, IHB Shipping Co EAD The freight market at the end of 2008 and at the beginning of 2009 is characterized by a considerable reduction of time-charter and goods carriage rates as a result of the global financial and economic crisis and the abnormal supply of ship tonnage in the market. The price levels in April 2009 reported a decrease of some 75% compared to the price levels in the summer of The 2009 trends are conflicting. The market condition depends on various factors, including the quantities of new and secondhand ships offered and the world economy. As of the beginning of 2009, the market has been unstable - periods of increased freight rates and periods of decreased freight rates alternate with each other. In this period, the rates increased by an average of some 2,5 times. The BDI rate as at the beginning of 2009 is 772 points, reaching points on 27 April 2009 and reporting a maximum of points as of the beginning of the year until the end of April. 40

41 Consolidated annual management report Privat Engineering AD The core activity of Privat Engineering is related to the management of projects in various segments, insurance and reinsurance agency and consulting services. The 2008 activity of Privat Engineering was carried out in three main directions: investments of its subsidiaries in new ships construction, insurance agency and consulting services. Ships with construction No 288 and No 289 will be delivered in In 2007, Karvuna Ltd, a newly established subsidiary of Privat Engineering, agreed the construction of a ton multi-purpose ship at Bulyard Shipbuilding Industry EAD, which is to be delivered in The payments due under the shipbuilding contracts are in EUR and USD. Privat Engineering has financed the ships building with own funds and loans granted by IHB. The financing is made through additional contributions to the capitals of the subsidiaries Emona, Marciana and Karvuna. At the end of 2008, BGN thousand of the value of the Emona ship, BGN thousand of the value of the Marciana ship and BGN thousand of the value of the Karvuna ship were paid. In December 2007, Privat Engineering AD incorporated another subsidiary in Varna - IHB Shipping Co EAD having capital of BGN In 2008, the capital of Privat Engineering was increased twice - in June and in November. In total, shares, each having nominal value of BGN 1 and issue value of BGN 5 upon the first increase and BGN 7 upon the second increase, were issued. The share capital was increased by BGN and the issue premiums increased by BGN thousand. The funds raised through the two increases total BGN thousand. All shares from the capital increases were subscribed by IHB. The raised funds will be used to finance the building of ships No 288, No 289 and No 458 built through Emona Ltd., Marciana Ltd. and Karvuna Ltd., subsidiaries of Privat Engineering. The 2008 operating income of Privat Engineering amounts to BGN 370 thousand compared to BGN 524 thousand in The major portion of this income represents commissions on direct insurance and consulting services. The 2008 financial result of Privat Engineering is a loss before taxes of BGN 611 thousand compared to a loss of BGN 116 thousand in The 2008 loss after taxes amounts to BGN 629 thousand compared to a loss amounting to BGN 105 thousand in The loss is the result of the fact the company is in process of making large investments and incurring expenses on a new business - the maritime transport, which will generate income following the building and management of the three new ships. Privat Engineering has payables on interests to IHB under loans granted to finance the building of the new ships. The assets of Privat Engineering as at 31 December 2008 total BGN thousand, reporting a nearly double growth compared to 2007 /BGN thousand/. The highest share is occupied by receivables from related parties totalling BGN thousand. These are additional contributions to the capitals of the subsidiaries Emona, Marciana and Karvuna. They bear no interests. Financial results of Privat Engineering Operating income Profit after Taxes BGN` BGN` (500) (1 000) Other income Operating income Profit after taxes 1625 (105) (629)

42 KLVK AD The 2008 activity of KLVK is related to consulting services. In 2008, IHB started to invest in the building of two new DWT ships - Future 56 Type at Bulyard Shipbuilding Industry AD, having a total value of EUR 60 million. The investment is financed through KLVK - through two new subsidiaries of KLVK - Odriya Ltd and Skitiya Ltd, established for the purpose. The ships with construction No 102 and 105 are to be delivered in May 2011 and The 2008 financial result of KLVK is a profit of BGN 173 thousand or a net profit of BGN 156 thousand compared to BGN 84 thousand in The assets of KLVK as at 31 December 8 total BGN thousand, reporting a considerable growth compared to 2007 /BGN thousand/, the highest share of which is occupied by receivables from related parties relating to additional contributions to the capitals of Skitiya Ltd. and Odriya Ltd. totalling BGN thousand. They were made to ensure the financing of ships with construction No 102 and No 105. In June and November, the capital of Privat Engineering was increased through the issue of a total of shares, each having nominal value of BGN 1 and all having a total value of BGN thousand. The shares of the capital increases were subscribed by IHB. As a result, the capital of KLVK AD as at 31 December 2008 amounts to BGN thousand. The raised funds have been planned to finance the building of ships with construction No 102 and No 105, which are in process of building through Odriya Ltd. and Skitiya Ltd., subsidiaries of KLVK. Financial results of KLVK Operating income Profit after Taxes BGN` BGN` Other income 50 Operating income Profit after taxes

43 Mr. Stefko Sivkov Cheef Executive IHB Shipping CO EAD Few industries have a more extreme market cycle than shipping. Recently to prove the point, the industry acquired fame as the sector of the world economy which lead the economic collapse and which collapsed the most. If we have in mind the respective fi gures for the last years, we shall observe that today the demand and supply fundamentals are the weakest since the 1980s with wet and dry bulk trade expected to decline and an order-book almost half the size of the fl eet. We should point out that since 1990 trade volumes only declined once by 0,2 % in But the current forecasts are that in 2009 the bulk will fall by over 5 %. The major bulk trades fall by arround 6 %, due to reduced volumes of coal, iron ore and grain. The minor bulks are aslo expected to fall by arround 5 %, due especially to reduced volumes of cement and steel products. Certainly, the trade fi gures can t be better with industrial production currently running 13% down on The only way for the ship-owning companies in IHB Group and for IHB Shipping Co to survive under the above mentioned circumstances is to fi nd and work with serious, with good background charterers and to optimize the daily running costs of the vessels - a target which is covered for the fi rst vessel of our fl eet - m/v Emona. IHB Shipping Co EAD The scope of activity of IHB Shipping Co EAD includes commercial maritime navigation and related production and technical, forwarding and agency activities, ship brokerage and agency, etc. The company was incorporated with the purpose of exercising control in the building of the ordered ships for companies within the IHB Group, management and providing of crews. The 2008 activity of IHB Shipping Co EAD is related to preparation for management of the ships in process of building for the IHB Group, which are to be delivered and commissioned in In 2008, the company mainly exercised investor control of the building of the ships of IHB at Bulyard Shipbuilding Industry on behalf and at the expense of the ship owner. This includes coordination of the technical ship projects, control of the quality of shipbuilding works and shipbuilding works compliance with the requirements of the organizations for classification and other maritime organizations. The company also rendered agency services relating to purchase and sale of ships and ship and other equipment. The 2008 income amounts to BGN 340 thousand. The company gained no income in 2007 as it was registered in December The 2008 financial result is a profit before taxes of BGN 10 thousand or a net profit of BGN 9 thousand. Financial results of IHB Shipping Co Sales income Profit after Taxes BGN`000 BGN` Sales income Profit after taxes

44 Machine Metal casting Leyarmach /ss/ MACHINE BUILDING ZMM Bulgaria Holding /s/ Metal cutting machines Electric machines Bulcari /s/ ZMM Sliven /ss/ Elprom ZEM /ss/ Mashstroy /ss/ ZMM Nova Zagora /ss/ 44

45 The machine building segment includes the following sub-segments: production of metal cutting and electric machines and metal casting building 45

46 Mr. Georgi Momchilov Chief Executive Officer, ZMM Bulgaria Holding Despite the fact that 2008 was very successful for the ZMM Bulgaria Holding Group, we foresee 2009 and 2010 as two extremely difi cult years ahead of us. We are trying to be well prepared for the challenges that the world economic crysis will bring to us. Despite the economic crisis that appeared in September, 2008 was a successful year for ZMM Bulgaria Holding and its subsidiaries in general. In 2008, the holding company and its subsidiaries ZMM Sliven, Mashstroy Troyan, ZMM Nova Zagora, Leyarmach and Elprom ZEM increased their sales income. At the same time, ZMM Bulgaria Holding strengthened its leading position in the production of universal lathes in Europe, developed strategic partnerships in the sphere of hydro-generators production with leading companies in Europe and made investments to improve the quality of metal casting. ZMM BH trade in the following basic groups of products produced by the companies under its control: Universal lathes - produced by ZMM Sliven and Mashstroy. Over 90% of the income of the company is realized through the sales of universal lathes; Lathes with CNC control produced by Mashstroy and ZMM Sliven; Lathes with cyclic program operation based on universal machines produced by Mashstroy; Drilling machines produced Mashstroy and ZMM Sliven; Combined wood processing machines produced by ZMM Sliven; Spare parts, units and details for metal cutting machines produced by ZMM Nova Zagora; Strip cutting machines produced by ZMM Nova Zagora; Cast irons produced by Leyarmach AD; Electric engines and hydro-generators and repair of hydrogenerators produced/offered by Elprom ZEÌ. The 2008 net sales income of ZMM BH amounts to BGN thousand compared to BGN thousand in ZMM BH reported an accounting profit before taxes of BGN thousand compared to BGN thousand in The 2008 net profit amounts to BGN thousand. In 2008, ZMM HB acquired shares of the capital of Elprom ZEM at the total value of BGN 41 thousand. Despite the 2008 positive results, the management of the hold- 46

47 Consolidated annual management report Mr. Dobromir Todorov Chief Execurive, ZMM Bulgaria Holding ing takes into consideration the fact that the metal cutting machines, i. e. universal lathers, CNC lathes and column drilling machines, belong to the so-called group of investment-purpose goods. The demand for such goods directly depends on the overall economic environment and the investment activity in a particular country or market. The estimated negative effect of the recession and the global economic crisis on the sales of investment-purpose goods is evidenced by the decreased number of orders in the fourth quarter of The management of the holding is of the opinion that the recovery of the machine building segment will begin not earlier than the middle of Therefore, the holding and its subsidiaries have developed a crisis action plan and prepared to commence restructuring and reorganization of the activities depending on the particular circumstances. Financial results of ZMM Bulgaria Holding /unconsolidated/ Operating income Profit after Taxes BGN` Other income Operating income Profit after taxes BGN`

48 Metal cutting machines Mr. Minko Taslakov Chief Executive, Mashstroy In 2008, ZMM Bulgaria Holding strengthened its position of leading producer of universal lathes in Europe. Having produced and sold over universal lathes in more than 60 countries, the company is quite ahead of its European competitors. In 2008, the major markets for the production of the company were the markets of Germany, Italy, USA, Turkey and Russia. The decreased demand for small lathes and the increased interest in medium and large lathes was an interesting trend characterizing the sales of the holding in This trend is expected to positively affect the future profitability of the holding. Mashstroy In 2008, Mashstroy produced and sold 665 machines, including 633 universal lathes, 29 digital machines and 3 drilling machines compared to a total number of machines of 740 produced in The smaller number of machines produced in 2008, however, means no lower income. The 2008 net sales income amounts to BGN thousand, including income from sales of production amounting to BGN thousand, compared to BGN thousand in In 2008, the company sold machines in the international market at the total value of BGN thousand, which forms 96% of the net sales income. The 2008 financial result is a loss before taxes of BGN 145 thousand or a net loss of BGN 174 thousand. Financial results of Mashstroy Operating income Profit after Taxes BGN` Other income Operating income Profit after taxes BGN` (500) (1 000) (1 500) (2 000) 532 (174) (1 569)

49 Consolidated annual management report ZMM Sliven Mr. Georgi Dobrev Chief Executive, ZMM Sliven The sales revenue of ZMM Sliven for 2008 is BNG thousand, which is the company greatest record for the last 20 years. During the last quarter of 2008 the company was affected by the world fi nancial and economic crises. The company business during 2009 should be considered with the current economical crises and the company main business task is to achieve sales revenue of 50 % of the 2008 revenue at least and to keep its position of a leading manufacturer and exporter of lathes in Bulgaria. In 2008, ZMM Sliven produced a total number of 900 machines, including 897 universal lathes and 3 CNC lathes compared to machines produced in 2007, including 995 universal lathes and 6 CNC lathes. The 2008 production reported an increase of 11.22% compared to the preceding year. The 2008 operating income of the company amounts to BGN thousand compared to BGN thousand in 2007, reporting a growth of 8.34%. The main portion of the operating income represents income from sales of production amounting to BGN thousand. The remaining portion represents income from sales of goods and services, while financial income occupies an insignificant share. The 2008 financial result of the company is a profit after taxes of BGN 971 thousand compared to a net profit of BGN 619 thousand in Financial results of ZMM Sliven Operating income Profit after Taxes BGN` Other income Operating income Profit after taxes BGN`

50 Mr. Margarit Todorov Chief Executive, ZMM Nova Zagora In 2008 ZMM Nova Zagora achieved a sales increase of 25% compared to We are keeping our leading position in producing gear wheels in Bulgaria. ZMM Nova Zagora AD The products produced and sold in 2008 are split into three major groups: details, units and machines. The technological equipment dominant within the works allow the production of rotation and symmetrical details such as pivots, shafts, shaft and cogged and cylindrical cogged wheels with involuted profile, chain wheels, gear racks and gåàr pulleys. In 2008, ZMM NZ produced production for BGN thousand. The details produced for sale in the country and export occupies the highest relative share of this production %, followed by the share of units % and the share of machines %. The 2008 net income from sales of production of ZMM Nova Zagora amounts to BGN thousand compared to BGN thousand in 2007, which represents a growth of BGN thousand or 25.80%. In 2008, the company commenced the production of series of feeding and support boxes for export to Russia. ZMM NZ also invested in the development of a full range of chip transporters for the lathes and centres type MAZAK imported in the country designated for users in the country and abroad. As a result of the prudence principle applied as a part of the accounting policy of the company, it made impairment of work in progress amounting to BGN 380 thousand at the end of the year. The financial result of ZMM Nova Zagora is a loss before taxes of BGN 328 thousand or a net loss of BGN 333 thousand. Financial results of ZMM Nova Zagora Operating income Profit after Taxes 50 BGN` Other income Operating income Profit after taxes BGN` (50) (100) (150) (200) (250) (300) (350) 5 0 (333)

51 Consolidated annual management report Metal casting Mr. Boyan Dimitrov Chief Executive, Leyarmach The most important achievement of Leyarmash in 2008 was the start using of new power economizing and high technological induction furnace. Leyarmash mastered a great diversity of complicated machine-building and power producing machine s castings from grey cast iron and spherographite cast iron single weight up to 10 tons. Leyarmach AD Leyarmach had certain production problems and had to make a strategic decision on its development in the years preceding Its available furnaces and equipment were not sufficient for ensuring the required quality of produced casts with a view to achievement of good return. On the other hand, the foundry is one of the main suppliers of ZMM Sliven and Mashstroy - it provides 50-55% of the casts used for lathe production but it needs investment so as to be efficient and profitable. Following thorough analyses, the management of IHB made a decision on development of cast production within the system of ZMM Bulgaria Holding and approved an investment program at the value of BGN 1.5 million for restoration and modernization of the capacities of Leyarmach. The aim is meeting the higher requirements on casts quality and quantity and ensuring environmental protection and maintenance of healthy and safe working conditions. The investment in two Financial results of Leyarmach Operating income BGN` Other income Operating income Profit after taxes new Inductotherm heating units, each of 5 tons and working under Dual-Track regime, was completed at the beginning of 2008 and they were commissioned in February The new furnaces ensured production capacity of the company of some tons under two-shift working regime. In 2008, a total of tons of casts was produced compared to tons in In 2008, a total of tons of casts /77.13%/ was sold to ZMM Sliven and Mashstroy, a total of 332 tons of casts /14.37%/ was sold to other clients in the country and a total of 196 tons of casts /8.50%/ was exported. The 2008 income of Leyarmach amounts to BGN thousand, including net sales income amounting to BGN thousand compared to a total income of BGN thousand in The financial result is a loss before taxes of BGN 178 thousand or a net loss of BGN 174 thousand. BGN` (50) (100) (150) (200) Profit after Taxes (55) 129 (174)

52 Electric machines Mr. Valentin Filipov Chief Executive, Elprom ZEM As a result of the investments, the income in 2008 reached BGN thousands, compared to BGN thousands in This year we increased the accuracy of all types of corpus prismatic and rotation details measurements in the manufacturing process thus assuring higher quality of the production by three main investments: introducing a new line and technology for establishing insulation system, type Global VPI, which improves the energy effectiveness of the low and high voltage electrical machines, a laser cutting machine - Trumpf and 3D digital measuring system Laser tracker. Despite the existing economic crisis we expect to execute successfully the 2009 business plan and to achieve 8% income growth compared to Elprom ZEM AD Elprom ZEM produces the following electric machines - synchronous and asynchronous electric engines, asynchronous generators and hydro-generators. The Company also repairs hydro-generators and machines for low and high voltage / HH and BH/. The produced products are mainly related to the building of new sites and replacement of existing ones in case of failure. The major consumers are companies operating in the power engineering, mining and ore-dressing, cement and food, beverage and tobacco industries, agriculture, water supply and other segments. The market strongly depends on world economy, the condition of the Bulgarian economy and the region in particular. The trend of stimulation of ecological power generation is a prerequisite for increase in the volume of construction of facilities for using renewable energy sources - water and wind. This increased the volume of production of hydro-generators and machines for small and large water power plants and of generators and electric motors for wind power plants. In 2008, Elprom ZEM worked under the following major contracts: NEC EAD - rehabilitation of stator magnetic circuits, stator windings and stator poles for the rotors of HG1, HG2 and HG4 of VETS Peshtera; VA TECH HYDRO, Austria - as a subcontractor of the production of HG for VETS Stouden Kladenets and VETS Tsnakov Kamak; CHKD BLANSKO - the Czech Republic - production and delivery of 4 HG; Kiloscar Brothers, India - production of 2 HG. The 2008 operating income of the company amounts to BGN thousand compared to BGN thousand in 2007, reporting a growth of BGN thousand or 49.43%. The income includes income from sales of electric engines 52

53 Consolidated annual management report amounting to BGN thousand /2007: BGN thousand/, income form sales of generators amounting to BGN thousand /2007: BGN thousand/ and income from repairs of hydro-generators amounting to BGN thousand /2007: BGN thousand/. There were produced 229 electric engines and 7 hydro-generators /HG/ - 2 for India, 2 for CHKD Blansko, 1 for MVETS Chair Dere, 1 for MVETS Houbcha and 1 for MVETS Ouhovitsa. There were rendered repair services for BGN thousand, including rehabilitation of HG 5 of VETS Peshtera, VETS Kardzhali, repair of an electric engine of Elatsite Med and others. The other income of Elprom ZEM amounts to BGN 738 thousand, including, rent, sales of technological waste, etc. The 2008 operating profit and profit after taxes of Elprom ZEM amount to BGN thousand and BGN 917 thousand. In 2009, Elprom ZEM has been working under the following material contracts: NEK AD - repair of HG 1, 2, 3 and 4 of VETS Stouden Kladenets, construction of new HG for VETS Dzherman, VETS Stob, MVETS Slavova and Blagoevgradska Bistritsa Cascade, Mavel - the Czech Republic - production of 2 HG and 4 HG for Canada. In the period , despite the present crisis, Elprom ZEM plans to increase production. The company is going to undertake actions in the production of wind generators, which will give it the opportunity to occupy a new market niche. Financial results of Elprom ZEM Operating income Profit after Taxes BGN` BGN` Other income 500 Operating income 0 Profit after taxes

54 River cruises Mrs. Katya Stoyanova Chief Executive, Dunav Tours For Dunav Tours 2008 was a year of consolidation of achievements. The capacity of newly purchased passenger ship Elegant Lady was fi lled, as well the other ships of the Company. The line of imposing Dunav Tours at the Russian market successfully continued and our presence in German-speaking market expanded. The crisis in the global economy, particularly in the fi elds of tourism, is a challenge for us to prove the effectiveness of our strategy - quality service, competitive prices and a team of professionals. River cruises form a specific tourist segment and follow the main trends of the segment. As a whole, the financial and economic crisis and the shrinking of holiday expenses negatively affect the tourist trips by ships worldwide in respect of sea and river cruises. This affects mainly the flow of tourists from non-european countries and the flow of European tourists with relatively guaranteed earnings due to the minimal additional and accompanying expenses to some extent. The segment is characterized by early reservations and risk sharing by ship owners and tour operators. As ships are chartered under long-term contracts, the short-term risk of decrease in the number of tourists is assumed by the persons granted charters, while ship owners experience difficulty in renewal of charter contracts or reduction of related prices in long-term aspect. Risk diversification may be achieved through optimization of expenses and offering of ancillary services, out-of-season and holiday trips and tourist programs in the country. 54

55 Consolidated annual management report Dunav Tours AD Dunav Tours is the majority owner of Dunav Tours Hotels AD, Tourist Company Dunav AD, Dunav River Shipping AD and Shipping Company Dunav EAD. In 2008, Dunav Tours and its subsidiaries operated a fleet of five own passenger ships - Sofia, Rousse, Rousse Prestige, Elegant Lady and Heinrich Heine, which they provided for periods of 3 to 5 years to persons who organize cruise programs and provide tourists. There is a trend of decrease in the effectiveness periods of contracts due to the financial crisis and higher competitiveness. Dunav Tours and its subsidiaries ensure the technical maintenance and proper technical condition of the ships, deals with the insurances and provides crews and hotel staff. The major market of the company is the European market. The main routes of the ships are Budapest - Vienna - Passau and the way back, cruisers along the delta of the Danube River for all ships and navigation along Rhein- Main-Danube channel for the Elegant Lady, Heinrich Heine and Rousse Prestige ships. The company also offers own cruises along Rhein - Main - the Danube River and Moselle out of the main ship season, as well as during Christmas, New Year and Easter days. The tour operator s and agent s activities of the group of Dunav Tours include tourist servicing of foreign ships berthed at the Bulgarian ports along the Danube River. In 2008, some 200 ships and tourists were serviced. The company acts as an agent of the coming foreign ships at some ports along the Danube River. The company has its own pontoon on the Danube River, covering an area of some 4 decares and suitable for the quayage of all types of river ships, including passenger ones and welcomes over 280 ships per year. As a whole, there is a negative effect of the tourist market and maritime transport shrinking in 2009, which may affect the following tourist seasons as well. Each year, repairs of the five passenger ships are made to ensure safe trips during the navigation season. In 2008, the reconstruction and repair of the Balkan yacht commenced jointly with Moteryat LTD, Turkey. Based on the approved technical project, the value is EUR The 2008 consolidated income of the company amounts to BGN thousand compared to BGN thousand in 2007, including income from core activity of BGN thousand - income from chartering of the five ships amounting to BGN thousand and income from tourist services and other amounting to BGN thousand, and other income of BGN 312 thousand from rent, sales of non-current tangible assets and insured events. The 2008 consolidated financial result is a profit after taxes of BGN thousand compared to BGN thousand in In 2009, the company expects a growth of 5% of income and profit based on the signed contracts for exploitation of the five ships. Financial results of Dunav Tours /consolidated/ Operating income Profit after Taxes BGN` BGN` Other income Operating income Profit after taxes

56 Furniture production Mrs. Tamara Hristova Chief Executive, Avgusta Mebel 2008 was a successful year for Avgusta Mebel we marked increase in production and sales by 28% compared to The world economic crisis refl ects negatively to the furniture production. Thus the main goals for 2009 are to keep the company on the market through activating the marketing and decreasing expenses. 56 Avgusta Mebel The markets of France, USA, Ireland, Great Britain and Greece have been the major markets of the company for the last several years. Most foreign clients of the company are wholesale traders and big companies for catalogue trade. Only a few of the clients sell directly to end users. Some of the sales are realized through Bulgarian companies. The French, Irish and American markets are characterized by the most serious shrinking. In 2008, there was no negative effect on the income of the company. By April 2009, the company has and fulfils orders under signed contracts. There are enquiries about new and produced samples. The fall in construction and investments in tourism, however, may negatively affect the results of the company. The 2008 volume of produced and sold products reports a growth of 27.50% compared to The products produced and sold by Avgusta Mebel in 2007 include hotel furniture of 41.54%, hotel-type furniture - the Financial results of Avgusta Mebel BGN` Operating income bungalows of a golf complex and a hostel of 6.94%, furniture items - series production /wardrobes, drawers, plots, tables and bed/ of 39.5%, office furniture of 2.66% and ship furniture of 9.36%. According to timber type, the structure is the following: furniture of massive timber of 23.3%, including wardrobes and drawers and furniture of veneered MDF and TPS with low percentage of details of massive timber of 76.7%. 30% of the 2008 sales were realized in the domestic market. The 2008 net sales income of Avgusta Mebel amounts to BGN thousand, including income from export amounting to BGN thousand /70%/ and income from sales in the domestic market amounting to BGN 937 thousand /30%/ compared to income amounting to BGN thousand, including income from export of 81% and income from sales in the domestic market of 19%, in The 2008 financial result of Avgusta Mebel is a profit before taxes of BGN 95 thousand and a profit after taxes of BGN 91 thousand compared to a loss of BGN 114 thousand in BGN` Other income (50) Operating income (100) Profit after taxes (150) Profit after Taxes 51 (114)

57 Consolidated annual management report Other International Industrial Holding Bulgaria AD The 2008 income of the company includes income from consulting services and gains on investments. Financial results of IIHB Operating income Profit after Taxes BGN` Other income Operating income Profit after taxes BGN`

58 Personnel. Personnel development As at 31 December 2008, IHB had 10 employees in total. At the end of 2008, the IHB Group had employees in total, of which 325 employed by associates compared to and 250 in 2007 respectively. The number of employees as per list as at 31 December 2008 is compared to in The table below shows the Group personnel as at 31 December 2008 and 31 December 2007, including associates, by segments and activities as per the approved segment structure of IHB portfolio: Personnel by sectors and activities I. IHB II. Maritime business - shipbuilding and ship repair - port operations - classification and certification - ship design - maritime transport III. Machine building IV. Furniture production V. River cruises VI. Other Total subsidiaries Total associates Total subsidiaries and associates Average number of employees as per the 2008 list Number of employees as per list as at 31 December Average Number of number of employees employees as per list as per the as at list December Information about the personnel of IHB on consolidated basis In associates In subsidiaries BGN` Number of employees The specifics of the activities of IHB, its segment portfolio and development of its group individual companies predetermine the requirements to its personnel. For the purpose, the management of the Holding applies a policy directed at enhancing the qualifications of hired employees who are in charge of the various aspects of the company activity. The development of priority segments and operations predetermines the need of new experts. In the course of time, the issue concerning the training and offering of employees with secondary special and engineering and technical education becomes quite serious. Many young people do not want to work in the production and industry segments. The settlement of this issue directly affects not only personnel provision but also production quality and the opportunities for development of research and innovation activities at the companies. To solve the problem, the management of IHB works in close cooperation with the academic society through: Training of students from technical schools and universities at most companies - Bulyard Shipbuilding Industry AD, Elprom ZEM AD, Mashstroy AD and ZMM Sliven AD; Participation of the companies management bodies in boards of technical universities, the Naval School, etc.; Development of joint projects between the higher education institutions and the Group s companies in relation to new developments and solving of certain issues related to the production and repair operations of Bulgarian Register of Shipping AD, Elprom ZEM AD and Bulyard Shipbuilding Industry AD; Hiring of trainees and graduates at the companies. The various programs for human resources development and employment encouragement of the Ministry of Labour and Social Policy, financed by the pre-accession funds, form another source for solving this problem. 58

59 Consolidated annual management report Financial resources management. Used financial instruments. Financial risk management. Description of major risks and uncertainties faced by the Company IHB is able to cover all of its liabilities. The key financial commitments of the Company are related to investment projects of its subsidiaries. In respect of receivables, the companies form relevant provisions when uncertainty as to their collectibility exists. Bulyard Shipbuilding Industry has signed contracts in USD and has payables under supply contracts in JPY. Measures have been undertaken to hedge the currency risk. IHB has no payables on loans from banks or other financial institutions. IHB has liabilities to bondholders related to the 2008 issue of convertible bonds, whose maturity date is 29 October Such liabilities due in 2009 represent interest payments, as to which IHB has no difficulty. The first interest payment was made on 29 April The guarantees that IHB has provided for liabilities of subsidiaries are secured. At this stage, there is no risk of failure in performance of the commitments by the subsidiaries, secured by the guarantees issued. The global financial and economic crisis affects the businesses of most companies, including the activities of the IHB Group companies. The considerable slowdown of the economic development and entry into recession of some economic regions and countries is highly probable and will affect the market and export conditions. Two of the direct effects of the crisis are the collapse in the global capital market, the Bulgarian Stock Exchange in particular and the limited and tightened lending. These effects make IHB continue its activities in a complex and hardly predictable business environment under the condition of clearly expressed specifics for the individual companies within the Group. At the same time, this is related to projects optimization and revision of project implementation schedules. The timely identification of the threats and risks characterizing the individual segments enabled IHB to undertake preventive actions and each subsidiary prepared a crisis action plan to optimize the personnel, reduce the expenses and review the efficiency of production and the technological relations within the Group. In November 2008, the management of IHB prepared a crisis action plan based on the assumption of reduced number of production orders in 2009 at some of the companies. As they are specialized in the production of product for export mainly, the companies operating in the machine building segment face an extraordinary reduction of expenses on investments on global level. As of the end of 2008, the companies operating in the machine building segment, except for Elprom ZEM, have reported a fall of over 40% in orders and production volume. Actions to reduce expenses and optimize production have been undertaken. The personnel was reduced by some 40% in the period November March The management of ZMM Bulgaria Holding is of the opinion that the recovery of the machine building segment will begin not earlier than the middle of Therefore, the 2008 profit of ZMM Bulgaria Holding amounting to BGN thousand will not be allocated but retained. This is the reason for the considerable decrease in the income from dividends of IHB in the first quarter of BGN 547 thousand compared to BGN thousand in the first quarter of The option for internal optimization and allocation of production and technological functions among all companies within the Group form an additional corporate resource for the companies of ZMM Bulgaria Holding. The positive effect of the centralized marketing, products unification, management of supplies and distribution of orders and sales is relied on. As Elprom ZEM has signed contracts for orders, which are in process of performance and have longer periods of performance, its activity is not expected to be negatively affected by the crisis. As to shipbuilding and ship repair, the market and economic environment is characterized by instability and unfavourable trends but there is also a possibility for reduction of raw materials and materials prices and easier access to qualified personnel. Bulyard Shipbuilding Industry has signed contracts for orders, which are in process of performance at present and have longer 59

60 Consolidated annual management report periods. There is a risk of changes in the prices of the shipbuilding contracts and/or their cancellation but it is assessed as relatively low as to the ships with delivery periods by 2010 inclusive. Nevertheless, Bulyard Shipbuilding Industry has optimized its personnel and the administrative personnel has been shifted to reduced working hours - the working time for 330 persons is 7 hours per day for a period of 3 months. At present, the decrease in the cargo flow worldwide affects port operations as well. The first indicators of fall in the markets of the IHB Group ports appeared in March 2009 for KRZ Port-Bourgas and in December for Odessoss PBM. The trends accompanying the business depend on the overall macroeconomic environment. As the two ports handle mainly metals and grain cargo, the 2009 results will depend on the grain crop as the metals market has shrunk by over 90% compared to The 2009 trends are conflicting. The market condition depends on various factors, including the quantities of new and second-hand ships offered and the world economy. As of the beginning of 2009, the market has been unstable - periods of increased freight rates and periods of decreased freight rates alternate with each other. In this period, the rates increased by an average of some 2,5 times. The BDI rate as at the beginning of 2009 is 772 points, reaching points on 27 April 2009 and reporting a maximum of points as of the beginning of the year until the end of April. No material effect on the business of Dunav Tours is expected in 2009 as it has signed ship charter contracts for Any material worsening of the economic conditions, however, may negatively affect the cruises business. In case of preservation of the stock exchange crisis and impossible recovery of share prices over the next 3 years, the announced conversion price of BGN 8.33 for conversion of the bonds with maturity date: 29 October 2011 issued by IHB Plc in 2008 may proved to be quite high. Information about used financial instruments and risk assessment is given in Item 35. Financial instruments of the Notes to the Financial Statements as at 31 December Comments on the risks concerning the Company s operations and risk management are given also in Item 5. Financial risk management of the Notes to the Financial Statements as at 31 December Opportunities for investment objectives realization, available funds and possible changes in the structure of operations financing In 2008, IHB covered its operating expenses with own and borrowed funds. The own funds represent operating income. The 2008 income sources of IHB include interests on loans granted to subsidiaries, dividend income received from subsidiaries and services sale income. The Holding used some of these funds to finance its investment program. Since the beginning of 2008, IHB has availed with funds raised through the capital increase in December 2007 totalling BGN thousand. The total amount received through the non-exercised rights is BGN thousand, payable to the right holders as of 4 February 2008 for a period of 5 years. The payables amount as at 31 December 2008 is BGN thousand. In 2008, IHB issued a second issue of corporate convertible bonds. The amount of the loan, which was signed on 29 October 2008, is BGN and the number of bonds is , each having a nominal value of BGN 100. The bonds are convertible, dematerialized, unsecured and freely transferable, bearing an annual interest of 8%. The loan maturity date is 29 October 2011, the interest payment period is a 6-month period and the fixed interest payment dates are as follows: 29 April 2009, 29 October 2009, 29 April 2010, 29 October 2010, 29 April 2011 and 29 October Conversion terms and conditions: The Management Board of the Company has determined a conversion ratio of 12 shares per bond. Events, resulting in change in the conversion ratio, may occur by the date of conversion. Conversion will be made on the maturity date of the debenture loan. Interim conversion will be made on the date of the fourth interest payment. Each bondholder will have the right to exchange its bonds for a number of shares as per the conversion ratio on the maturity date instead of payment of such bonds. The funds were raised to finance investment projects of IHB and group subsidiaries in 2008 in the maritime business sector, i. e. priority projects in the spheres of maritime transport and port operations. A portion of these funds will be used to partially finance the building of ton multipurpose ship with construction No 458, owned by Karvuna Ltd., a subsidiary of Private Engineering. Another portion of the funds will 60

61 Consolidated annual management report be used to partially finance the investment in two new dwt ships, Type F56, having a total value of EUR 60 million, at Bulyard Shipbuilding Industry. The investment will be financed through the subsidiary KLVK AD. The ships with construction No 102 and No 105 are to be delivered in May 2011 and The remaining portion of the raised funds will be used for the implementation of the project for extension and modernization of the port terminal at KRZ Port Bourgas. The plan envisages extension of the existing quay wall with 180 metres and expansion the total port area. Strengthening works will be done on the old quay wall as well. The ship lots will become 3, each of 125 metres. The project also envisages an option for construction of additional quay. In the western section of the port, there will be built special grains terminal, while the remaining area will be used for procession and storage of general cargo. The project, the value of which is some BGN 23 million, is to be implemented within 3 years. A portion of the funds raised through the new issue of bonds will be invested in the project. In the following years, capital expenses may be incurred to finance the projects in implementation and the new projects of IHB and its subsidiaries, including ones related to the investment program of the dockyard for the particular year, next stages of the extension of the port terminal in Bourgas, concession of passenger ports along the Danube, conclusion of contracts for new ships building, etc. If necessary, the Holding will continue the financing of the group companies development on current basis. Capital expenses may be incurred in relation to new acquisitions and business expansions related to the development priorities of IHB as well. Over the short period as of the debenture loan registration on 29 October 2008 to 31 December 2008, IHB disbursed no funds of the total of BGN raised through the issue of convertible bonds. IHB has a credit limit, agreed with DSK Bank as of the end of 2006, for issue of bank guarantees and working capital financing of the Holding and/its group companies at the amount of BGN 4.5 million, BGN 3 million of which is in the form of revolving credit line. In case of necessity, the management will use it to finance the activities of IHB. The equity of IHB /excluding minority interest/, on consolidated basis, as at 31 December 2008 amounts to BGN thousand, reporting an increase of BGN thousand or 6.42%. This increase is the result of increase in the reserves and retained profit of The net retained profit as at 31 December 2008 amounts to BGN thousand, including the 2008 profit of BGN thousand. The total liabilities of IHB, on consolidated basis, as at 31 December 2008 amount to BGN thousand compared to BGN thousand as at 31 December The increase is the result of the debenture loan concluded in BGN thousand, increase in the trade and other receivables by BGN thousand, including the amount of BGN thousand related to non-exercised rights as to the 2007 capital increase. The received prepayments also reported an increase - BGN thousand at the end of 2008 compared to BGN thousand at the end of Important post balance sheet events No important post balance sheet events occurred. Important scientific research and developments IHB did not carry out any scientific research or development over the reporting period. IHB Group companies have been permanently carrying out development activities as to their products and technologies. The most innovation efforts of the teams are directed at improvement of offered products and certain processes of their development through use of modern materials and technologies. The receivables of IHB, on consolidated basis, as at 31 December 2008 amount to BGN thousand compared to BGN thousand in 2007, the main portion of which represents short-term trade and other receivables /BGN thousand/. 61

62 Foreseen development of the company Major trends in the activities of IHB The major trends regarding the activities of the Holding in the next years are expected to be related to: Acquisition, assessment and sale of interests in other companies; Management of the companies in its own portfolio, where IHB can exercise control, directly or through related parties; Establishment of new companies; Investment in the portfolio companies, where IHB has long-term interests; Financing of the companies, where the Holding owns interests. The major strategic interests of IHB are in the following sectors and activities: Maritime business - shipbuilding and ship repair, port operations, classification and certification, maritime transport; River cruises; Machine building. Plans of material importance related to the activity of IHB The 2009 efforts of the management are focused on optimization of the activities of the subsidiaries to overcome the trends of decreased consumption and demand and reduction of expenses on investments. In 2009, the building of the ton ships with construction No 288 and No 289 and ton ship with construction No 458 is expected to be completed. The management of IHB Shipping Co EAD, which is to manage the ships, hopes to be successful in their chartering in consideration of the present market environment. In 2009, the technical preparation for the project implementation will be in process of performance. Some of the administrative procedures concerning the project are closed and permission on its commencement is expected to be given by the Ministry of Transport and the Ministry of Regional Development and Public Works. Changes in the price of the Company s shares In 2008, the price of the shares of IHB fell from BGN 9.74 to BGN 1.6 per share as at the end of the year or by %. Over the same period, the indices fell as follows: SOFIX by 79.11%, BG40 by % and BGTR30 by 75.14%. The shares remained one of the most liquid items on BSE-Sofia throughout the year. Data about the Company s shares (BSE code 4ID) trading in 2008 Statistics for the period 1 January December 2008 /source: BSE- Sofia/ Value Initial price opening price (in BGN) Last weighted average price (in BGN) 1.60 Maximal weighted average price (in BGN) Minimal weighted average price (in BGN) 1.53 Weighted average price for 2008 (in BGN) 6.95 Percentage change in data base for % accounting purposes* Value change (in BGN) Number of transactions in Traded volume in 2008 (number of shares) Average monthly volume (number of shares) Turnover in 2008 (in BGN) Average monthly turnover 2007 (in BGN) * The values have been adjusted due to capital increase Graph of the movement of the price of the shares of IHB during the period 1 January December 2008 Date Weighted average price of the shares of IHB in 2008 /BSE-Sofia code 4ID/

63 Consolidated annual management report As of the beginning of 2009, fall on the world and Bulgarian securities markets has been observed. Over the period as of the first year session on 5 January 2009 to 20 March 2009, the indices fell as follows: SOFIX by 24%, BG40 by 18% and BGTR30 by 26%. The price of the shares of IHB also followed this trend and fell to BGN 1.24 or by 24%. Data about the Company s bonds trading On 16 December 2008, the trading in the 2008 corporate bonds issue of IHB Plc started on the floor of BSE-Sofia AD, bonds segment. The BSE code is 4IDC. The issue amount is BGN , and the number of bonds is , each having nominal value of BGN 100. The market lot is one lot equalling 10 bonds. The registered order price is expressed as a percentage of the nominal of one market lot /net price/ and the price of a bonds purchase and sale order excludes the interest accrued as of the last interest payment till the order registration. The listing price as at 16 December 2008 is 100% of the nominal. The transaction cash settlement is executed in BGN. By the end of 2008, the corporate bonds were traded on 17 December 2008 only - trading characteristics: volume lots, weighted average price - BGN , minimal price -BGN 100 and maximal price - BGN 102. Shareholding structure as at 31December 2008 The capital of IHB as at 31 December 2008 is BGN Shareholders Number of shareholders Number of shares % of the capital All ,00% Legal entities % Individuals % Shareholders owing over shares /0004%/ % Shareholders legal entities owing over % shares Shareholders individuals owing over % shares Shareholders foreign persons owing over % shares, including Legal entities, including: % Individuals owing over shares inclusive % Shareholders owing over 5%, including % Venside Enterprise Limited % Bulls AD % DZH AD % Chimimport AD % Shareholders owing less than 5% % 63

64 64

65 Industrial Holding Bulgaria PLC Consolidated Financial Statements for the year ended 31 December 2008 With Independent Auditors Report Thereon

66 Consolidated Financial Statements Independent Auditors Report To the shareholders of Industrial Holding Bulgaria PLC Report on the Financial Statements We have audited the accompanying consolidated financial statements of Industrial Holding Bulgaria AD, ( the Company ) which comprise the consolidated balance sheet as at 31 December 2008, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. Except as described in the Basis for qualification in our Оpinion paragraph, we conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Basis for Qualified Opinion In the consolidated financial statements of the Company as at 31 December 2008 are included work-in-progress amounting to BGN 26,503 thousand (31 December 2007: BGN 22,649 thousand). Part of the work-in-progress, amounting to BGN 19,277 thousand (31 December 2007: BGN 14,733 thousand), relates to uncompleted ship construction in Bulyard Shipbuilding Industry EAD. Using the current accounting processes of the shipyard, the total amount of costs allocated to each ship construction contract can be sufficiently and reasonable determined and accounted for when the construction of the ship is finished. Аs at 31 December 2008 Bulyard Shipbuilding Industry EAD is in the process of introducing accounting procedures to determine and account for the costs attributable to each stage of construction of the ship on a forecasted basis. This process started during the preceding financial year and caused us to qualify our opinion on the financial statements relating to that year. Therefore, due to the long period of construction of ships and transition in different accounting years, we were not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for work-in-progress and related impact on the income statement for the year ended 31 December 2008 and for the year ended 31 December

67 Consolidated Financial Statements Qualified Opinion In our opinion, except for the effects of such adjustments, if any in Bulyard Shipbuilding Industry EAD, as might have been determined to be necessary to work-in-progress, changes in inventory, revenue, income tax expenses and net profit, the consolidated financial statements give a true and fair view of the financial position of the Company as at 31 December 2008, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, adopted by the European Union. Report on Other Legal and Regulatory Requirements Annual report of the activities of the Company in accordance with the requirements of article 33 of the Accountancy Act As required under the Accountancy Act, we report that the historical financial information prepared by Management and disclosed in the annual report of the activities of the Company, as required under article 33 of the Accountancy Act, is consistent, in all material aspects, with the financial information disclosed in the audited financial statements of the Company as of and for the year ended 31 December Management is responsible for the preparation of the annual report of the activities of the Company which was approved by the Management Board of the Company on 30 April Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 30 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 67

68 Consolidated Financial Statements Consolidated income statement For the year ended 31 December 2008 In thousands of BGN Note Revenue 7 132, ,386 Other operating revenue 8 10,555 15,007 Increase in work-in-progress 9 6,514 4,103 Capital expenses for construction 10 36,387 12,947 Cost of materials 11 (90,107) (92,938) Hired services 12 (37,987) (33,048) Depreciation and amortization 18, 19 (5,553) (4,500) Personnel expenses 13 (37,413) (31,565) Cost of assets sold 14 (583) (1,862) Other operating expenses 15 (3,776) (3,448) Impairment of goodwill 19 (1,628) - Profit from operations 9,323 12,082 Finance income 5,612 1,687 Finance expenses (2,966) (1,804) Net finance income 16 2,646 (117) Income from equity accounted associates 20 2,180 2,424 Profit before tax 14,149 14,389 Income tax expense 17 (1,338) (1,051) Profit after tax 12,811 13,338 Attributable to equity holders of the company 11,913 12,258 Minority interest 898 1,080 Net profit for the year 12,811 13,338 Basic earnings per share (BGN) 29 0, The income statement is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 8 to 56. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 30 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 68

69 Consolidated Financial Statements Consolidated balance sheet As at 31 December 2008 In thousands of BGN Note Assets Property, plant and equipment , ,218 Intangible assets 19 4,954 1,471 Goodwill 19 6,212 7,840 Investments in equity accounted associates 20 13,081 11,627 Other investments Long-term receivables 22 1, Total non-current assets 184, ,048 Inventories 23 72,552 54,765 Trade and other receivables 24 40,695 30,942 Non-current assets held for sale 25-1,338 Financial assets held for trade Cash and cash equivalents 27 80,569 86,256 Total current assets 193, ,301 Total assets 377, ,349 Equity Issued capital 28 43,756 43,756 Share premium 24,503 24,503 Reserves 53,989 51,269 Retained earnings (net) 78,262 68,882 Total equity attributable to equity holders of the company 200, ,410 Minority interest 29,614 29,155 Total equity 230, ,565 Liabilities Loans and borrowings 30 5,448 7,351 Debenture loan 30 21,650 - Other long-term payables Provisions Deferred tax liabilities 33 5,938 6,046 Total non-current liabilities 34,208 14,282 Loans and borrowings 30 3,627 4,934 Debenture loan Trade and other payables ,444 77,205 Provisions Total current liabilities 113,636 82,502 Total equity and liabilities 377, ,349 The balance sheet is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 8 to 56. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 30 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 69

70 Consolidated Financial Statements Consolidated statement of cash flows For the year ended 31 December 2008 In thousands of BGN Note Operating activities Net profit for the year 12,811 13,338 Adjustments for: Depreciation and amortisation 18, 19 5,553 4,500 Provisions Impairment of goodwill 1,628 - Foreign exchange losses, net Interest expense 16 1,274 1,163 Interest income 16 (3,333) (746) (Income)/loss from associates 20 (2,180) (2,424) Impairment losses 15а. 1,026 - (Gain)/loss on sale and writing-off of property, plant and equipment 8a. (7,369) (12,890) (Loss)/gain derived from investments held for trading (32) (253) Income tax expense 17 1,338 1,051 Operating profit before changes in working capital and provisions 11,801 4,341 (Increase)/decrease in trade and other receivables 12,805 (34,780) (Increase)/decrease in inventories (18,679) (5,206) Increase in trade payables, other payables, and provisions 12,912 32,383 Cash generated from operations 18,839 (3,262) Interest paid (1,406) (2,033) Interest received 1, Income taxes paid (1,472) (1,321) Cash flows from operating activities 17,421 (5,894) Investing activities Proceeds from sale of plant and equipment 8,222 16,317 Interest received Proceeds from sale of investments held for trading - 1,624 Acquisition of investments (432) - Proceeds from repaid loans - 6,259 Loans given (604) - Acquisition of property, plant and equipment and paid capital expenses for construction (45,396) (20,426) Acquisition of minority interest - (8,491) Acquisition of other investments - - Dividends received 1, Cash flows from investing activities (36,364) (4,016) 70

71 Consolidated Financial Statements Consolidated statement of cash flows, continued For the year ended 31 December 2008 In thousands of BGN Note Financing activities Share issue - 47,123 Debenture loan received 21,650 - Interest repaid for the debenture loan - (304) Loans received 20,557 29,273 Loans repaid (25,969) (24,248) Payment of finance lease liabilities (91) (700) Other financial expenses (paid) / received 466 (4) Proceeds from sale of share rights 19,673 - Dividends paid (348) (267) Cash flows from financing activities 35,938 50,873 Net increase in cash and cash equivalents 16,995 40,963 Cash and cash equivalents at 1 January 27 53,556 12,593 Cash and cash equivalents at 31 December 27 70,551 53,556 The Statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 8 to 56. Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 30 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 71

72 Consolidated Financial Statements Consolidated statement of changes in equity For the year ended 31 December 2008 In thousands of BGN Note Share capital Share premium Additional and legal reserves Revaluation reserves Retained earnings Total Group Minority interest Balance as at 1 January ,003-7,975 7,321 56,356 92,655 20, ,558 Recognized profit for the current year ,258 12,258 1,080 13,338 Share issue 22,753 24, ,256-47,256 Share capital increase of a subsidiary ,925 1,925 Increase in share holdings in a subsidiary (263) - Revaluation ,557-39,557 11,059 50,616 Tax effect from revaluation 17, (3,956) - (3,956) (1,106) (5,062) Movement in the revaluation reserve from (323) sale of assets Allocation of profit for reserves (488) Other movements - - (71) Dividends declared (273) - Acquisition of minority interest (4,172) (4,172) Foreign currency translation difference (23) (23) - (23) Balance at 31 December ,756 24,503 8,520 42,749 68, ,410 29, ,565 Balance as at 1 January ,756 24,503 8,520 42,749 68, ,410 29, ,565 Current year profit ,913 11, ,811 Movement in the revaluation reserve from (56) sale of assets Allocation of profit for reserves - - 2,804 - (2,804) Dividends declared (352) (352) Increase in share interest in a subsidiary (87) (87) Other movements - - (28) Currency translation adjustment Balance at 31 December ,756 24,503 11,296 42,693 78, ,510 29, ,124 The statement of changes in equity is to be read in conjunction with the notes to and forming part of the financial statements set out on pages 8 to 56. Total Daneta Zheleva Executive Director Toshka Vassileva Chief Accountant Gilbert McCaul Partner Dobrina Kaloyanova Registered auditor KPMG Bulgaria OOD 30 April , Fridtjof Nansen Street Sofia 1142 Bulgaria 72

73 Consolidated Financial Statements Notes to the consolidated financial statements Note Page 1. Reporting entity Basis of preparation Significant accounting policies Determination of fair values Financial risk management Segment Reporting Revenue Other operating revenue Increase/(decrease) in work-in-progress Capital expenses for construction Expenses for materials Expenses for hired services Personnel expenses Cost of assets sold Other operating expenses Net finance income/ (expenses) Income tax expense Property, plant and equipment Intangible assets Investments in equity accounted associates Other investments Long term receivables Inventories Trade and other receivables Non-current assets held for sale Financial assets held for trade Cash and cash equivalents Share capital and reserves Earnings per share Loans and borrowings Trade and other long-term payables Provisions Deferred tax assets and liabilities Trade and other payables Financial instruments Related parties Subsequent events Contingent liabilities Comparative information

74 Consolidated Financial Statements 1. Reporting entity Industrial Holding Bulgaria AD (the Company or the Holding) is a joint stock company domiciled in Bulgaria with registered address: Sofia 1000, 47, Vassil Levski Blvd. The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the financial statements of the Company and its subsidiaries (together referred to as the Group ) and the Group s investments in associates. The operations of the Group include production and trading of heavy machinery, shipbuilding, shiprepair and transportation, furniture production, operations with real estates, port services, support services to vessels and vehicles, maintenance and repair and other services. Industrial Holding Bulgaria AD as well as some of its subsidiaries are traded on the Bulgarian Stock Exchange, Sofia. 2. Basis of preparation (а) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) and adopted by the European Union. The financial statements were approved by the Group management on 24 April (b) Basis of measurement The consolidated financial statements have been prepared on historical cost basis except for the following: Land, buildings, plant, machinery and equipment are presented at a revalued amount, reduced with the accumulated depreciation and impairment losses Financial instruments at fair value through profit or loss are measured at fair value Available-for-sale financial assets are measured at fair value. (c) Functional and presentation currency These consolidated financial statements are presented in Bulgarian Lev (BGN), which is the Company s functional currency. All financial information is presented in leva rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements in compliance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: Note 18 Property, plant and equipment Note 19 Intangible assets Note 24 Trade and other receivables Note 26 Financial assets held for trade Note 32 Provisions Note 33 Deferred tax assets and liabilities (e) Going concern These financial statements have been prepared applying the assumption that the Group is a going concern and will continue to operate in the foreseeable future. In the last three months of 2008, the global credit crisis has escalated into a global economy crisis. It has impacted all sectors and industries. The probability of slowdown of the economic growth, and even entering into recession of some economic regions and countries, is significant and this will affects market conditions and export terms. The crisis caused a downturn in the global stock markets and particularly the Bulgarian Stock Exchange. The financial implications of the crisis resulted in restricted access to bank credit facilities. Due to the specifics of its subsidiaries, the Group operates in a more difficult and unpredictable business environment. Concurrently, this leads to project optimisation, actualisation of plans and implementation schedules. The timely identification of threats and risks in different segments allowed Group management to act in a prudent manner. Anti-crisis programs were developed at each subsidiary for personnel optimisation, cost cutting and review of the production efficiency and technological relations within the Group. The economic environment in shipbuilding and shiprepair is characterised with instability and negative trends, but also provides opportunities for price cutting of materials and access to qualified personnel. Although there is a risk for price cutting of the shipbuilding contracts or their cancellation, this risk is relatively small for the contracts with scheduled delivery in The subsidiaries in the machinery construction segment produce mainly for export and are exceptionally limited in their global investment opportunities. Nevertheless, they operate within a corporate structure ZMM Bulgaria Holding AD - which is a leader in machinery construction. The opportunity for internal optimisation and transferring of production and technologic assignments among the companies within the Group represent additional advantage of the corporate structure. Companies rely on the positive effect of the centralised marketing, product unification, supply-chain management and allocation of orders and sales. 3. Significant accounting policies The accounting policies presented below are consistently applied to each of the periods presented in these financial statements. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are the enterprises controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control 74

75 Consolidated Financial Statements commences until the date that control ceases. (ii) Associates Associates are those enterprises in which the Group has significant influence, but not control over the financial and operating policies. The consolidated financial statements include the Group s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated to the extent of the Parent interest in the enterprise. Unrealized gains arising from transactions with associates are eliminated against the investment in associates. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to BGN at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign exchange differences arising on retranslation are recognised in the income statement. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to BGN at exchange rates at the reporting date. The income and expenses of foreign operations are translated to BGN at exchange rates at the dates of the transactions. Foreign currency differences from translation are recognised directly in equity. (c) Financial instruments Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition non-derivative financial instruments are measured as described below. A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group s obligations specified in the contract expire or are discharged or cancelled. (i) Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-tomaturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. (ii) Available-for-sale financial assets The Group s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign exchange gains and losses on availablefor-sale monetary items, are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. (iii) Investments at fair value through profit or loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. (iv) Trade and other receivables Trade and other receivables are stated at amortised cost less any amounts, which are not expected to be collected. The latter are presented as impairment losses on the basis of the calculated recoverable amount of trade receivables. (v) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (vi) Loans and borrowings Interest-bearing borrowings are recognised initially at cost, less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. (vii) Trade and other payables Trade and other payables are stated at their amortised cost. (d) Property, plant and equipment (i) Recognition and measurement Measurement at initial recognition 75

76 Consolidated Financial Statements At initial recognitions, items of property, plant and equipment are measured at cost, which comprises its purchase price, including import duties and non-refundable purchase taxes and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Measurement after recognition The group has chosen the revaluation model of IAS 16 for carrying land, buildings, plant and machinery at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subseqent accumulated impairment losses. The fair value of items of land, buildings, plant and machinery is usually determined from market-based evidence by an appraisal that is undertaken by professionally qualified valuers. The revaluation of items of land, buildings, plant and machinery is usually made every 5 years. An additional revaluation can be made when the fair value substantially changes from the carrying value within a shorter period. The Group s land, buildings, plant and machinery were revalued to their fair market value based on estimates, by an independent registered valuer as at 31 December Items of vehicles, fixtures and fittings, other tangible assets and assets under construction are stated in the balance sheet at their acquisition cost less accumulated depreciation and impairment losses. (ii) Reclassification to investment property Property that is being constructed for future use as investment property is accounted for as property, plant and equipment until construction or development is complete, at which time it is remeasured to fair value and reclassified as investment property. Any gain or loss arising on remeasurement is recognised in profit or loss. When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised directly in equity. Any loss is recognised immediately in profit or loss. (iii) Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately including inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is recognised in the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the assets are as follows: buildings 7 50 years plant and equipment 4 20 years vehicles 2 10 years fixtures and fittings 5 10 years Depreciation methods, useful lives and residual values are reassessed at the reporting date. (e) Intangible assets (i) Goodwill Acquisitions Goodwill represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. (ii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and impairment losses. Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. (iii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iv) Amortisation Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives are as follows: patents and trademarks 7 years software products 5 years f) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Each of them is measured at inception of the lease contract. Other leases are operating leases and, except for investment property, the leased assets are not recognised on the Group s balance sheet. Investment property held under an operating lease is recognised on the Group s balance sheet at its fair value. 76

77 Consolidated Financial Statements (g) Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Write downs are recognised when the cost of inventories exceeds their net realizable value. Write downs are recognised in profit or loss. The cost of inventories is based on the weighted average principle for materials and work in progress. In the case of manufactured inventories (produced goods), cost also includes direct labour, social security and depreciation expenses. These expenses are allocated to products based on normal operating capacity. (h) Impairment (i) Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in the income statement. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity. (ii) Non-financial assets The carrying amounts of the Group s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. (i) Share capital and reserves The capital of the Group is presented at historical cost at the date of registration. Additional and legal reserves comprise those reserves of the parent company, as well as the share of subsidiaries reserves allocated after the date of acquisition. Revaluation reserves are allocated as at the date of revaluation of property, plant and equipment. (j) Employee benefits (i) Defined contribution plans According to the current legislation, the Government of Bulgaria is responsible for providing pensions in Bulgaria under a defined contribution pension plan. The obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss when they are due. (ii) Annual paid leave The Company recognises as a liability the undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee s service for the period completed. (iii) Other long-term employee benefits The Group has an obligation to pay retirement benefits to those employees, who retire with the Group in accordance with the basic provisions of art. 222 Para 3 of the Bulgarian Labor Code. According to the provisions of the Labor Code, on termination of the labor contract of a worker or an employee of the Group who has become entitled to retirement, the Group is due to pay him/her a compensation amounting to his/her double gross monthly salary. If a worker or an employee has work experience of 10 or more years in the company as at the date of retirement, he or she is entitled to compensation amounting to six gross monthly salaries. At each balance sheet date the management makes an approximate estimation of the potential compensations due to employees, using reports from actuaries. (k) Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (i) Warranties A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. (ii) Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. (iii) Site restoration In accordance with the Group s published environmental 77

78 Consolidated Financial Statements policy and applicable legal requirements, a provision for site restoration in respect of contaminated land, and the related expense, is recognised when the land is contaminated. (iv) Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (l) Revenue (i) Goods sold Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. No revenue is recognized if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods. (ii) Services rendered Revenue from services rendered is recognized in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to the costs incurred compared to the total expected costs under the contract. (iii) Construction contracts As soon as the outcome of a construction contract can be estimated reliably, contract revenue and expenses are recognised in the income statement in proportion to the stage of completion of the contact. The stage of completion is assessed by reference to surveys of work performed. An expected loss on a contract is recognised immediately in the income statement. (iv) Rental income Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (m) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. (n) Finance income and expenses Finance income comprises interest income on funds invested, dividend income, gains on the disposal of availablefor-sale financial assets, changes in the fair value of financial assets at fair value through profit or loss, foreign currency gains, and gains on hedging instruments that are recognised in profit or loss. Interest income is recognised as it accrues, using the effective interest method. Dividend income is recognised on the date that the Group s right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, foreign currency losses, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognised on financial assets, and losses on hedging instruments that are recognised in profit or loss. All borrowing costs are recognised in profit or loss using the effective interest method. (o) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement, except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (p) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group s primary format for segment reporting is based on business segments. 78

79 Consolidated Financial Statements (q) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. (r) New International Financial Reporting Standards (IFRSs) and interpretations (IFRIC), endorsed by the European commission but not yet effective as at the balance sheet date A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2008, and have not been adopted in preparing these financial statements: Amendment to IFRS 2 Share-based Payment vesting and termination conditions (effective 1 January 2009). The amendments to the Standard clarify the definition of vesting conditions and introduce the concept of non-vesting conditions. Non-vesting conditions are to be reflected in grant-date fair value and failure to meet non-vesting conditions will generally result in treatment as a cancellation. The amendments to IFRS 2 will be effective for financial statements for 2009 and will be adopted retrospectively. Management considers that the amendments to the Standard will not have any impact on the Company as the Company does not have any share-based compensation plans. IFRS 8 Operating Segments (effective 1 January 2009). The Standard introduces the management approach to segment reporting and requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the Group s Chief Operating Decision Maker in deciding how to allocate resources and in assessing performance. The Standard will have no effect on the profit or loss or equity and the management expects the new Standard not to alter significantly the presentation and disclosure of its operating segments in the financial statements. Revised IAS 1 Presentation of Financial Statements (effective from 1 January 2009). The revised Standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income (effectively combining the income statement and all non-owner changes in equity in a single statement), or in two separate statements (a separate income statement followed by a statement of comprehensive income). The Company is currently evaluating whether to present a single statement of comprehensive income, or two separate statements. Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Company s 2009 financial statements and will constitute a change in accounting policy for the Company. In accordance with the transitional provisions the Company will apply the revised IAS 23 to qualifying assets for which capitalization of borrowing costs commences on or after the effective date. IFRIC 13 Customer Loyalty Programs addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programs for their customers. It relates to customer loyalty programs under which the customer can redeem credits for awards such as free or discounted goods or services. Such entities are required to allocate some of the proceeds of the initial sale to the award credits and recognise these proceeds as revenue only when they have fulfilled their obligations. IFRIC 13, which becomes mandatory for the Company s 2009 financial statements, is not expected to have significant impact on the financial statements. Management believes that it is appropriate to disclose that the following revised standards, new interpretations and amendments to current standards, which are included under the accounting IFRS framework as approved by the International Accounting Standards Board (IASB), but are not yet endorsed for adoption by the European commission, and therefore are not taken into account in preparing these financial statements: 35 Improvements to 24 IFRSs and IASs (2008) Revised IFRS 3 Business Combinations (2008) Revised IFRS 1 First-time adoption of IFRS Amendments to IFRS 1 and IAS 27 related to Cost of an Investment in a Subsidiary, Jointly-Controlled Entity or Associate Amendments to IAS 32 and IAS 1 related to Puttable financial instruments and obligations arising on liquidation Amendments to IAS 39 related to Eligible hedged items; effective date and transition IFRIC 12 Service Concession Arrangements IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners. As at the date of preparation of these financial statements, management have not completed the process of evaluating the impact that will result from adopting these revised standards, new interpretations and amendments to current standards in future. 4. Determination of fair values A number of the Group s accounting policies and disclosures require the determination of fair value, for both 79

80 Consolidated Financial Statements financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Property, plant and equipment The fair value of property, plant and equipment are presented on market values determined by an independent registered appraiser. (ii) Investments in equity and debt securities The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. The fair value of held-to-maturity investments is determined for disclosure purposes only. (iii) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. 5. Financial risk management The Group has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risk This note presents information about the Group s exposure to each of the above risks, the Group s objectives, policies and processes for measuring and managing risk, and the Group s management of capital. Further quantitative disclosures are included throughout these financial statements. The management has overall responsibility for the establishment and oversight of the Group s risk management framework. The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers and investment securities. Trade receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each c ustomer. This exposure may also depend on the default risk of the industry and the internal market on which the Group operates. In order to diversify the risk the Group manages the risk for each sector in conformity with its weight in the portfolio of Industrial Holding Bulgaria AD. Because of that the Group diversifies its risk. The credit policy determines that each new customer is analysed individually for creditworthiness before the Group s standard payment and delivery terms and conditions are offered. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Investments The Company invests primary in businesses and companies which it controls and could establish their development strategy. In its portfolio construction the Group invests only in liquid securities. Guarantees The Group s policy is to provide financial guarantees only to subsidiaries and upon approval from its management board. At 31 December 2007 the Group has provided guarantees for liabilities to third parties as disclosed in note 38. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted. The Group management supports the efforts of its subsidiaries to receive bank credits for investments and to use the opportunities, provided by revolving credit lines, for working capital management. The amount of borrowed capital is maintained at a certain level and new borrowing is undertaken only after its economic efficiency is proved by the subsidiary. Borrowed capital improves the Company liquidity and is essential for the operations growth. In the last years the management policy aims the Group to obtain new funds from the capital markets by issuing shares, bods and other similar financial instruments. New funds are invested in the subsidiaries by providing loans in order to finance their projects and by participating in the subsidiaries share increases. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. 80

81 Consolidated Financial Statements Currency risk In order to minimise the exposure to currency risk the management of the Group reduced to a minimum payments in currencies other than the Bulgarian lev (BGN) or Euro (EUR). Some of the companies in the Group are exposed to a limited currency risk mainly due to purchases and/or sales and/or loans in currencies other than the functional currency. A Group tendency is to deal in BGN or EUR. Bulyard Shipbuilding Industry AD has contracts in U.S. Dollars (USD) and Japanese yen (JPY). There are measures undertaken for hedging the currency risk. Interest rate risk The group is exposed to interest rate risk. There are loans with flexible interest rates corresponding to the current market prices. To reduce the interest rate risk exposure, the Company is trying to increase the proportion of loans with fixed interest. Capital management The management s policy is to maintain a strong capital base so as to maintain owners and market confidence and to sustain future development of the business. The Company seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. In 2008 the Group s return on equity is 5.94% (2007: 6.51%). There were no changes in the Company s approach to capital management during the year. The Company is not subject to contractual or legally imposed capital requirements. 6. Segment reporting Segment information is presented in respect of the Group s business segments. The format is based on the Group s management and internal reporting structure. Inter-segment pricing is determined on an arm s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise goodwill, minority interest, loans and tax liabilities. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Business segments The Group comprises the following main business segments: Machinery construction. The manufacturing and sale of metal-cutting machines, production, repair and sales of electric machines; and foundry. Shipbuilding and transportation services. The manufacturing and reconstruction of ships and all types of vessels, as well as related services, transportation services, port activities, and classification and certification. Other operations include provision of consulting services, production of furniture, real estate operations and others. Geographical segments All of the segments are located and operate in the geographical area of Bulgaria. 81

82 Consolidated Financial Statements 6. Segment reporting, continued Business segments Machinery construction Shipbuilding & transport Other operations Eliminations Consolidated In BGN thousand Total revenue from external customers 65,383 57,029 73, ,925 4,365 3, , ,393 Inter-segment revenue (919) (561) - - Total revenue 65,443 57,029 74, ,928 4,459 3,997 (919) (561) 143, ,393 Profit from operations 7,530 6,940 1,044 4, ,323 12,082 Net financing costs 2,646 (117) Income/(loss) from associates ,180 2, ,180 2,424 Income tax expense (1,338) (1,051) Net profit for the year 12,811 13,338 Machinery construction Shipbuilding & transport Other operations Consolidated In BGN thousand Segment assets 78,071 75, , ,130 47,480 49, , ,522 Investment in associates ,081 11,627 13,081 11,627 Unallocated assets ,090 8,171 Total assets , ,320 Segment liabilities 16,052 15,363 79,409 66,871 20, ,156 83,199 Unallocated liabilities Loan liabilities ,075 12,285 Debenture loan ,650 - Income tax liabilities ,113 Total liabilities ,844 96,597 Capital expenditure 3,835 4,599 44,876 17, ,775 22,178 Depreciation 2,757 1,926 2,322 2, ,232 4,322 Amortisation

83 Consolidated Financial Statements 7. Revenue In BGN thousand Note Sale of production 58,751 51,247 Shipbuilding 7a. 48,128 76,197 Sale of services 14,612 10,665 Ship repairing 5,699 3,827 Port activities 3,593 1,898 Sale of goods and materials 2,131 3, , ,386 7a. As at 31 December 2008 revenues recognized upon completed stages of construction of ships Karvuna, Emona and Martsiana which were ordered within the Group, were eliminated. These revenues amounts to BGN 30,759 thousand (2007: 6,739) and are recognized in the individual financial statement of Bulyard Shipbuilding Industry AD and they are eliminated at group level. The related expenditure is disclosed in note 10 Capital expenses for construction. Revenue from shipbuilding is recognized based on the stage of completion of a contract activity. There are three stages of completion for the shipbuilding contracts. The recognition of revenue and expense is associated with a completed stage. For the first two stages revenue is recognized to the amount of the cost incurred. Profit is recognized in the last stage. As a consequence, shipbuilding revenue is not comparable period over period. 8. Other operating revenue In BGN thousand Note Gain on disposal of property, plant and equipment 8a. 7,369 12,890 Other revenue 3,186 2,117 10,555 15,007 8a. Gain on disposal of property, plant and equipment In BGN thousand Income from sale of non-current assets 8,315 16,479 Carrying amount of assets sold (946) (3,589) 7,369 12,890 Gain on disposal of property, plant and equipment is mainly due to: sale of property, plant and equipment of Bulyard Shipbuilding Industry AD BGN 7,236 thousand; sale of plants and equipment of Elprom ZEM AD, Mashstroy AD and KRZ Port Bourgas AD total amounts to BGN 133 thousand. 83

84 Consolidated Financial Statements 9. Increase/(decrease) in work-in-progress In BGN thousand Mashstroy AD (430) 287 Leyarmash AD 150 (169) ZMM Sliven AD 1,125 (24) Augusta Mebel AD 54 (141) KRZ Port-Bourgas AD 30 (10) ZMM Nova Zagora AD Elprom ZEM AD 1, Bulyard Shipbuilding Industry AD 3,851 3,623 KLVK AD ,514 4, Capital expenses for construction In BGN thousand Mashstroy AD 1, ZMM Sliven AD KRZ Port-Bourgas AD Elprom ZEM AD Bulyard Shipbuilding Industry AD 4,424 5,011 Bulgarian Register of Shipping AD Karvuna ship 10,618 - Martsiana - ship 6,020 - Emona ship 14,121 6,738 36,387 12,947 Amount paid for capitalized expenses for construction of own assets is presented in the Cash flow statement as Acquisition of property, plant and equipment and paid capital expenses for construction. 11. Expenses for materials In BGN thousand Primary materials 80,635 83,782 Supplementary materials 3,287 2,436 Energy 3,641 3,170 Repair parts 1, Others 1,393 2,936 90,107 92,938 84

85 Consolidated Financial Statements 12. Expenses for hired services In BGN thousand Hired services 26,836 24,206 Repairs 2,749 1,237 Communications Security Naval fee registration and technical documentation Provided guarantees Insurance 1,051 1,267 Intermediation commissions Advertisements Rents Other 3,085 3,274 37,987 33, Personnel expenses In BGN thousand Wages and salaries 27,044 22,871 Mandatory social security contributions 6,531 6,118 Management contracts, Managing, Supervisory Board 1, Mandatory social and health security contributions Accruals under IAS 19 unused paid leaves Accruals under IAS 19 retirement compensation Other personnel expenses 1,960 1,215 37,413 31,565 The average number of employees for the Group in 2008 was 2,766 employees (2007: 2,818 employees). 14. Cost of assets sold In BGN thousand Bulyard Shipbuilding Industry AD 251 1,688 Mashstroy AD Leyarmash AD ZMM Sliven AD Augusta Mebel AD - 2 KRZ Port - Bourgas AD 3 16 ZMM Nova Zagora AD 4 9 Elprom ZEM AD 9 2 ZMM Bulgaria Holding ,862 85

86 Consolidated Financial Statements 15. Other operating expenses In BGN thousand Note Impairment 15a. 1, Legal obligations and warranties Business trip expenses Other expenses 1,842 2,170 3,776 3,448 15a. Impairment losses In BGN thousand Impairment of receivables Impairment of inventory Impairment of long-lived assets 10-1, Net finance income/(expenses) In BGN thousand Finance income Interest income 3, Dividend income 1, Net profit resulting from transactions with financial assets Recognized negative goodwill ,612 1,687 Finance expenses Interest expense (1,274) (1,163) Net foreign exchange difference (472) (134) Net loss resulting from transactions with financial assets (423) - Other financial profit/(loss), net (797) (507) (2,966) (1,804) 2,646 (117) 86

87 Consolidated Financial Statements 17. Income tax expense Recognised in the income statement In BGN thousand Note Current tax expense Current year 1,446 1,204 1,446 1,204 Deferred tax expense Origination and reversal of timing differences (108) (153) 33 (108 (153) Total income tax expense in income statement 1,338 1,051 Current income tax expense has been calculated using a rate of 10% (2007:10%), applied to the tax base. Deferred taxes are recognized applying the income tax rate for 2008 of 10% (2007: 10%). Reconciliation of effective tax rate In BGN thousand Net profit for the period 12,811 13,338 Total income tax expense 1,338 1,051 Profit before income tax 14,149 14,389 Tax expense using applicable tax rate: (10%) (1,415) (10%) (1,459) Tax on non-deductible expenses 0% (95) 0% (52) Tax exempt income sales of shares 0% - 0% 17 Tax exempt income dividends 1% 154 3% 461 Other 0% (43) 0% (31) Utilized tax losses from previous periods 0% 61 0% 13 (9%) (1,338) (7%) (1,051) Income tax recognized directly in equity In BGN thousand Property, plant and equipment - 5,062-5,062 Including: for the Group - 3,956 for the Minority interest - 1,106-5,062 87

88 Consolidated Financial Statements 18. Property, plant and equipment In BGN thousand Land and buildings Plant and equipment Other fixed Assets assets under construction Cost Balance at 1 January ,030 33,346 3, ,488 Additions 99 1,623 1,014 18,939 21,675 Disposals (2,586) (1,405) (231) - (4,222) Transfers 3,187 4, (7,606) (188) Revaluation 47,682 2, ,616 Offset of accumulated depreciation to book value (3,815) (5,056) (116) - (8,987) Impairment (27) (27) Transfers to assets held for sale (933) (476) (137) - (1,546) Balance at 31 December ,637 34,968 4,038 12, ,809 Balance at 1 January ,637 34,968 4,038 12, ,809 Additions ,568 44,603 Disposals (75) (94) (108) (51) (328) Transfers 1,020 12, (13,898) - Transfers from assets held for sale Revaluation (11) (1) Other decreases - (82) (5) - (87) Balance at 31 December ,520 47,999 5,252 40, ,566 Depreciation and impairment losses Balance at 1 January ,122 9,279 1,696-14,097 Depreciation charge for the year 844 3, ,322 Depreciation for assets written-off (23) (453) (157) - (633) Offset of accumulated depreciation to book value (3,815) (5,056) (116) - (8,987) Depreciation of assets transferred to assets held for sale (116) (71) (21) - (208) Balance at 31 December ,735 1,844-8,591 Balance at 1 January ,735 1,844-8,591 Depreciation charge for the year 1,094 3, ,232 Depreciation for assets written-off (2) (55) (57) - (114) Depreciation of assets transferred from assets held for sale Other decreases - (80) (5) - (85) Revaluation of assets (1) (1) Balance at 31 December ,201 10,228 2,292-13,721 Total 88

89 Consolidated Financial Statements 18. Property, plant and equipment, continued Land and buildings Plant and equipment Other fixed Assets assets under construction Carrying amount At 1 January ,908 24,067 1, ,391 At 31 December ,625 28,233 2,194 12, ,218 At 1 January ,625 28,233 2,194 12, ,218 At 31 December ,319 37,771 2,960 40, ,845 Part of machines, plant and equipment with book value of BGN 50,185 thousand serve as collateral for the Group bank loans, bank guarantees and/or letters of credit to suppliers. The Group management periodically reviews the fair values of its land, buildings, plant and equipment. Such reviews were made as at 1 January 2003 and 31 December 2007 and the assets were revalued to their fair values, based on estimates performed by an independent registered appraiser. Based on the valuation, performed by the independent registered appraiser as at 31 December 2007, the carrying amounts of land and buildings; machines, plant and equipment; and other assets were increased by BGN 47,682 thousand, BGN 2,898 thousand and BGN 36 thousand respectively. The effect of the revaluation is recorded in the revaluation reserve (see note 28 Share capital and reserves). Total 19. Intangible assets In BGN thousand Patents and trade-marks Software Other intangible assets Carrying amount At 1 January At 31 December ,471 At 1 January ,471 At 31 December ,365 4,954 Total The depreciation charge for the intangible non-current assets for the year ending 31 December 2008 amounts to BGN 321 thousand (2007: BGN 178 thousand). The intangible assets for the period amount to BGN 4,954 thousand from which BGN 3,616 thousand represent cost for improvement of leased assets. Due to the fact that the intangible non-current assets owned by the Group are immaterial, no detailed note has been prepared on their movement during 2007 and

90 Consolidated Financial Statements 19. Intangible assets, continued (i) Goodwill In thousands of BGN Goodwill Balance at 1 January ,318 Increases through acquisition of minority interest 1,522 Balance at 31 December ,840 Balance at 1 January ,840 Impairment (1,628) Balance at 31 December ,212 The Group performed a goodwill impairment test as at Goodwill amounts to BGN 7,840 thousand, which consist mainly of goodwill from the acquisition of Bulyard Shipbuilding Industry AD BGN 6,842 thousand. The analysis is based on the value in use for 5 years period. Calculation is based on the financial budgets approved by the management of Bulyard Shipbuilding Industry AD. The discount rate used is 13.6% for each year of the forecast. As a result of the calculation, the Company estimated impairment amounting to BGN 1,628 thousand. (ii) Negative goodwill The negative goodwill which arose as a result of acquisitions in subsidiaries for both reporting periods can be analysed as follows: In BGN thousand Elprom ZEM AD 45 - ZMM Sliven AD Total negative goodwill, recognised in the Income statement Goodwill in 2007 is due to acquisition of 15.38% of the equity of Bulyard Shipbuilding Industry AD, 3.09% of ZMM Sliven and 23% of the equity of Hydropower AD. (iii) Acquisition of subsidiaries and minority interest Acquisition of minority interest During the year the Group acquired the following additional interest in subsidiaries and relative share of net assets: In BGN thousand Net % Net assets assets % ZMM Sliven AD Hydropower AD Bulyard AD, Bulyard Shipbuilding Industry AD - - 3, Elprom ZEM AD ,172 In 2007 a company from the Group purchased 11,500 shares, representing 23% of the equity of the subsidiary Hydropower AD for the amount of BGN 13 thousand. As a consequence, the Group became the sole owner of Hydropower AD. Because of the acquisition, goodwill in the amount of BGN 5 thousand was recognized. In March 2007, Bulyard AD increased its share capital by issuing 8,600 thousand ordinary voting shares with par value BGN 1. Industrial Holding Bulgaria participated in the capital increase proportionately to its interest in Bulyard AD and acquired 5,289 ordinary voting shares. Bulyard AD used the capital contribution to acquire 25% of the equity shares of Bulyard Shipbuilding Industry AD from Navigation Maritime Bulgare. As a consequence, Industrial Holding s interest in Bulyard Shipbuilding increased to 61.5% from 46.12% in In 2007, ZMM Bulgaria Holding AD purchased 8,832 shares of ZEM Sliven AD increasing its interest in the company to 95.98%. Because of the acquisition, negative goodwill in the amount of BGN 136 thousand was recognized. ZMM Bulagria holding AD sold 500 shares, representing % of its interest in Elprom ZEM AD, at a profit of BGN 7 thousand. 90

91 Consolidated Financial Statements In 2008, a company from the Group purchased 4,450 shares, representing 0.37% of the equity of the subsidiary Elprom ZEM AD for the amount of BGN 42 thousand. As a consequence, the Group s interest in Elprom ZEM AD increased to 80.08%. Because of the acquisition, negative goodwill in the amount of BGN 45 thousand was recognized in the Income statement. In 2008, Industrial Holding Bulgaria AD purchased 30 shares of equity of KRZ Port Bourgas AD for the amount of BGN In October 2008, the subsidiary KLVK AD purchased all shares issued by Skitia Ltd and Odria Ltd, registered in Marshall Islands. The companies contracted with Bulyard Shipbuilding Industry AD to build two ships for bulk cargo type Future 56, DWT with construction numbers 102 and 105. (iv) Share increases of subsidiaries In April 2007, Bulyard Shipbuilding Industry AD increased its share capital by BGN 5,000 thousand with an issue of 5,000 thousand ordinary voting shares with par value of BGN 1 each. All issued shares are subscribed by the parent company Bulyard AD. Industrial Holding Bulgaria AD participated proportionately to its interest in the second increase of the capital of Bulyard AD and acquired 2,875 thousand ordinary voting shares by contributing 2, 875 thousand leva. In 2007, Privat Engineering AD, a wholly owned subsidiary of the Group, increased its share capital twice by issuing 140 thousand ordinary voting shares with par value BGN 1 and issue price of BGN 7, and 160 thousand ordinary voting shares with par value BGN 1 and issue price of BGN 10. All new shares are subscribed and paid by another subsidiary of the Group. In April 2007, Leyarmash AD increased its share capital. The issued shares were subscribed by Mashstroy AD 150 thousand shares, and ZMM Sliven AD 350 thousand shares with par value and issue price of BGN 1 each. As a consequence, the subsidiary remains fully controlled by the Group. In November 2007, the share capital of KRZ Port Burgas AD was increased by an issue of 500 thousand ordinary voting shares. Shares issued were subscribed by Industrial Holding Bulgaria AD and its interest increased from 91.72% to 98.24%. Capital increases of subsidiaries in 2008 In June 2008, the share capital of KLVK AD and Privat engineering AD was increased by BGN 2,000 thousand and BGN 1,050 thousand, respectively. Both capital increase transactions were registered with the Registry agency in August In November 2008, KLVK AD and Privat Engineering AD registered a second increase of their share capital with BGN 3,000 thousand each by issuance of shares with par value of BGN 1. The shares were fully subscribed by Industrial Holding Bulgaria AD. (v) New subsidiaries In 2007, the subsidiary of Industrial Holding Bulgaria AD, Privat Engineering AD invested in a new company, IHB Shipping Co EAD, which has registered capital of BGN 200 thousand consisting of 200 thousand shares with par value of BGN 1. Operations of the new subsidiary include maritime business and all related production, transportation and intermediation activities, ship brokerage and agency and others. It was created in order to control the building of ships, ordered by Group companies, to manage them and to provide crews. The new company was incorporated by virtue of court decision of the Varna Regional Court dated and In 2007, the subsidiary Privat Engineering AD established three companies, registered on Marshall Islands. Both Emona Ltd and Martsiana Ltd assumed the rights and obligations of Emona and Martsiana for the shipbuilding contracts. The third company Karvuna Ltd became a party to a contract with Bulyard Shipbuilding Industry AD for construction of ship number 458. In 2008, Emona and Martsiana registered in Malta were closed and all assets and liabilities were transferred to Emona Ltd and Martsiana Ltd. 20. Investments in equity accounted associates The Group has the following investments in associates: Country Ownership Dunav Tours AD Bulgaria 48.45% 48.45% VIK-Sandvik-IHB Design AD Bulgaria 50.00% 50.00% Istrum Travel Cyprus 50.00% 50.00% Odessos PBM AD Bulgaria 30.00% 30.00% In 2007, VIK-Sandvik-IHB Design AD Varna, was established jointly by Industrial Holding Bulgaria and a Norwegian company with the intent to operate in the ship design business. Each company owns 50% of the registered share capital of BGN 250 thousand. More than 40 highly qualified employees are working in the new company. In 2008, there is no change to the investments in associates. 91

92 Consolidated Financial Statements 20. Investment in associates, continued Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Group: In BGN thousand Current assets Ownership Noncurrent assets Total assets Current liabilities Noncurrent liabilities Total liabilities Revenues Expenses Profit / (loss) 2007 Dunav Tours AD 48.45% 1,370 38,489 39,859 7,161 15,842 23,003 19,955 (15,667) 4,288 Istrum Travel 50.00% 4,354-4,354 1,286-1,286 26,705 (26,449) 256 Odessos PBM AD 30.00% 398 5,265 5, ,452 (1,212) 240 VIK-Sandvik-IHB Design AD 50.00% , (254) 296 7,083 43,865 50,948 9,099 15,842 24,941 48,662 (43,582) 5, Dunav Tours AD 48.45% 1,734 38,297 40,031 10,535 10,269 20,804 19,669 (15,798) 3,871 Istrum Travel 50.00% 3,737-3, ,393 (28,315) 78 Odessos PBM AD 30.00% 336 5,489 5, ,697 (1,573) 124 VIK-Sandvik-IHB Design AD 50.00% , ,098 (1,639) 459 6,767 43,969 50,736 11,416 10,269 21,685 51,857 (47,325) 4,532 The movements in the investment in associates can be presented as follows: In BGN thousand Dunav Tours AD At 1 January 8,159 6,082 Share of increase in net assets 1,875 2,077 Dividend (726) - At 31 December 9,308 8,159 Istrum Travel At 1 January 1,534 1,406 Share of increase in net assets At 31 December 1,573 1,534 Odessos PBM AD At 1 January 1,661 1,589 Share of increase of net assets At 31 December 1,698 1,661 VIK-Sandvik-IHB Design AD At 1 January Investment Share of increase of net assets At 31 December Total investments in associates at 31 December 13,081 11,627 During 2008, the Group interest in net assets of equity accounted investments increased by BGN 2,180 thousand (2007: BGN 2,424 thousand). 92

93 Consolidated Financial Statements 21. Other investments In BGN thousand Meteko AD 7 7 Other Long term receivables In BGN thousand Mak Gabrovo - 70 Chimremontstroy Engineering AD Receivables related to cession contract Receivables related to loan granted Other long term receivables - 5 1, Inventories In BGN thousand Note Raw materials and consumables 42,364 30,305 Impairment of raw materials and consumables (138) (138) Work-in-progress 23а. 27,209 22,649 Impairment of work-in-progress 23а. (706) - Finished goods 3,824 1,947 Impairment of finished goods (186) - Supplies Merchandise ,552 54,765 23a. Work-in-progress Work-in-progress includes: In BGN thousand Work-in-progress from shipbuilding 19,277 14, Work-in-progress from shiprepair Work-in-progress from machine-building 7,054 7,039 Other ,503 22,649 93

94 Consolidated Financial Statements 24. Trade and other receivables In BGN thousand Note Trade receivables 4,550 11,210 Court receivables Related party receivables Tax receivables 1,333 2,632 Other receivables Advance payments and pre-paid expenses 33,100 16,387 40,695 30,942 Related party receivables as at refer to declared but not paid dividend as at the balance sheet date from Dunav Tours AD for the amount of BGN 726 thousand and prepayments to VIK-Sandvik-IHB Design AD for construction services. 25. Non-current assets held for sale As at , non-current assets, amounting to BGN 1,338 thousand, are reclassified as assets held for sale. Reclassification is made after management decisions in two Group companies to recover the carrying amount of these assets through their sale and not through their continuing use. The carrying amount as at 31 December 2008 of these assets is as follows: In thousands of BGN Land and buildings Plant and equipment ,338 In 2008, Bulyard Shipbuilding Industry AD sold part of its assets, including land and buildings, classified as at as held for sale for the amount of BGN 866 thousand. The remaining assets held for sale in Mashstroy AD for the amount of BGN 472 thousand were not sold in Starting 1 January 2008, these were reclassified to non-current assets and depreciated in Financial assets held for trade In thousands of BGN Shares at purchase cost - 1,361 Disposals - (1,361) Cost at 31 December - - In 2007, 38,555 shares were sold at an average price of BGN per share. The net income from the sale amounts to BGN 253 thousand and results from deducting the share value and the sale costs from the revenue amount. 27. Cash and cash equivalents In BGN thousand Cash at bank 70,425 53,463 Cash in hand Cash as per cash flow 70,551 53,556 Restricted cash 10,018 32,700 Cash and cash equivalents in the Balance sheet 80,569 86,256 94

95 Consolidated Financial Statements As at , Cash at bank includes cash reserved for shipbuilding at the amount of BGN 5,640 thousand. As at , restricted cash included: BGN 3,411 thousand for collateral of letter of credits, opened in favour of suppliers in relation to shipbuilding and shiprepair activities; BGN 29,270 thousand to secure the issued bank guarantees in favour of third parties; BGN 19 thousand other restricted cash. As at restricted cash includes: BGN 2,720 thousand for collateral of letter of credits for prepayment by clients and BGN 7,298 thousand for collateral of letter of credits, opened in favour of suppliers. Both guarantees and letter of credits relate to shipbuilding. 28. Share capital and reserves Share capital is stated at nominal value as per court registration. As at 31 December 2008, the authorised share capital comprised BGN 43,756 thousand ordinary shares (2007: BGN 43,756 thousand) with a par value of BGN 1. In July 2007, after conversion of debenture loan in 5,251 thousand ordinary voting shares with par value BGN 1 each, the Sofia City Court registered the capital increase of Industrial Holding Bulgaria AD from BGN 21,003 thousand to BGN 26,254 thousand. In December 2007, the capital of Industrial Holding Bulgaria was increased from BGN 26,254 thousand to BGN 43,756 thousand with a new issue of 17,502 thousand shares with par value BGN 1 and issue price BGN Share premium reserve in the amount of BGN 24,503 thousand was recognized. The second increase of the share capital in 2007 was registered at Sofia District Court on and at Central Depository and shareholder s book on The registered capital is stated at par value and is fully paid. There are no preference or bearer shares. The holders of ordinary shares are entitled to receive dividends as declared after each year end and are entitled to one vote per share at meetings of the Group. All shares rank equally with regard to the Group s residual assets. Shareholders of Industrial Holding AD that own greater than 5% of the shares of the Company: Shareholder Number of shares 31 December Number of shares % 31 December % Venside Enterprises Ltd 13,472, % 13,472, % Bulls AD 5,783, % 5,493, % DZH AD 2,440, % 2,440, % Himimport AD - - 4,011, % General Stock Investment 2,343, % - - Others 19,717, % 18,338, % 43,756, % 43,756, % Additional and statutory reserves The additional and statutory reserves are formed by allocation of 10% of profit in accordance with the requirements of the Trade Act, and by allocating additional reserves from the retained earnings. These reserves comprise additional and statutory reserves of the parent company as well as the share of reserves of the subsidiaries formed after the date of acquisition. Revaluation reserve The revaluation reserve was formed as a result of the revaluation of property, plant and equipment less the deferred tax liabilities arising in respect of the revaluation. 95

96 Consolidated Financial Statements 29. Earnings per share (i) Basic earnings per share The calculation of basic earnings per share as at 31 December 2008 was based on the net profit attributable to ordinary shareholders of BGN 11,913 thousand (2007: BGN 12,258 thousand) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2008 of 43,756 thousand (2007: 35,770 thousand), calculated as follows: Net profit attributable to ordinary shareholders In BGN thousand Net profit for the year 12,811 13,338 Net profit attributable to ordinary shareholders 11,913 12,258 Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 January 43,756 21,003 Effect of conversion of debenture loan - 2,618 Effect of exercised rights - 10,902 Effect of shares issued in December - 1,247 Weighted average number of shares at 31 December 43,756 35, Loans and borrowings This note provides information about the contractual terms of the Group s interest-bearing loans and borrowings. For more information about the Group s exposure to interest rate and currency risk, refer to note 35. In BGN thousand Non-current liabilities Secured bank loans 5,303 7,250 Lease liabilities ,448 7,351 In BGN thousand Debenture loan Long term portion 21,650-21,650 - Current liabilities Current portion of secured bank loans 3,528 4,897 Lease liabilities ,627 4,934 Debenture loan Current portion - - Current portion accrued interest

97 Consolidated Financial Statements According to , the Trade Register announced the issuance of debenture loan of Industrial Holding Bulgaria AD under the following conditions: ISIN code: BG ; Total nominal value (amount of the debenture loan) BGN 21,649,600 (twenty-one million six hundred forty-nine thousand and six hundred) distributed in 216,496 (two thousand sixteen four hundred ninety-six) dematerialized, interestbearing, convertible, free transferable, unsecured debentures, each with par value of 100 (one hundred) BGN; Term (maturity) of the debenture loan: 3 (three) years (36 months or 1,095 days), counted from issuance date; Date starting the maturity period: ; Interest: 8.00% (eight percent) per annum; Interest payment period: 6 month; Conversion ratio: 12, which determines conversion price of BGN 8.(33); Conversion: on maturity of emission and intermediate conversion on fourth interest payment date; Dates of payment: for principal one-time at maturity; for interest payments: , , , , and Payment administration bank - Allianz Bank Bulgaria AD pending meeting the requirements of Regulation No8 of Central Depository for securities. If the current stock exchange downturn remains for the next three years and the share price does not increase, it is likely that the conversion debentures amounting to BGN 21,649,600 which Industrial Holding AD issued in 2008 and which have their maturity at will not be entirely converted at the announced conversion price of BGN Terms and debt repayment schedule 2008 In BGN thousand Total 1 year or less Over 1 year Secured bank loans: EUR 315 thousand EURIBOR+2.3% investment loan BGN 21,650 thousand 8% debenture loan 21,650-21,650 EUR 450 thousand EURIBOR +2.3% refinancing BGN 71 thousand EURIBOR +2.3% EUR 333 thousand EURIBOR +2.3% investment loan EUR 350 thousand BIR +3.5% for working capital BGN 11 thousand BIR +4.30% investment loan BGN 177 thousand BIR+3.92% 3 credit line BGN 265 thousand BIR +3.50% investment loan EUR 406 thousand 3 - month EURIBOR +2.3% working capital loan EUR 430 thousand 3 - month EURIBOR +2.3% investing loan BGN 200 thousand floating BIR +2.7% working capital EUR 712 thousand monthly EURIBOR +2.9% investment loan 1, ,078 EUR 335 thousand monthly EURIBOR +2.85% investment loan EUR 5,000 thousand 3 - month EURIBOR +2% credit line 1,956-1,956 EUR 1,000 thousand monthly EURIBOR+3% investment loan Finance leases: EUR 17 thousand finance lease 3 - month EURIBOR EUR 47 thousand finance lease 6.70% EUR 73 thousand finance lease average interest rate 7.50% ,725 3,627 27,098 97

98 Consolidated Financial Statements Terms and debt repayment schedule 2007 In BGN thousand Total 1 year or less Over 1 year Secured bank loans: EUR 205 thousand 3 - month EURIBOR +2.3% investment loan EUR 100 thousand 3 - month EURIBOR +2.3% working capital loan BGN 200 thousand floating BIR +2.7% working capital loan EUR 430 thousand 3 - month EURIBOR +2.3% investment loan EUR 450 thousand monthly EURIBOR +2.3% investment loan BGN 250 thousand floating BIR +3.5% investment loan EUR 690 thousand 3 - month EURIBOR +2.4% investment loan EUR 314 thousand 3 - month EURIBOR +2.3% investment loan Overdraft 3 - month EURIBOR +2.0% working capital loan BGN 75 thousand floating BIR +6.2% working capital loan BGN 125 thousand floating BIR +4.3% investment loan BGN 108 thousand floating BIR +4.98% nvestment loan BGN 50 thousand floating BIR +5.24% credit line BGN 42 thousand floating BIR +4.40% credit line EUR thousand monthly EURIBOR+3% 1, EUR thousand 6 month EURIBOR+2.15% 6,244 1,355 4,889 Finance leases: BGN 44 thousand finance lease 3 - month EURIBOR BGN 15 thousand finance lease no interest free EUR 47 thousand finance lease interest rate 6.70% ,285 4,934 7,351 The bank loans are secured with a pledge of machinery and equipment at the carrying value of BGN 50,185 thousand at (2007: BGN 39,793 thousand). Additionally, KRZ Port-Burgas AD has been pledged as collateral as an entity. 31. Other long-term payables In BGN thousand Financing Other long-term payables The financing is under project Development of a procedure for inspection and acquisition of a ship class and internet based system for management of the inspection activity for Bulgarian Register of Shipping AD; financing from National Investing Fund at the Executive Agency for Support of Small and Medium Enterprises for development of new technology for construction of insulation system in Elprom ZEM AD and financing by DSK Bank AD under conditions of credit line of EBRD for energy efficiency in Leyarmasch AD and by Ministry of Labour and Social Policy in Labour Conditions Fund in ZMM Nova Zagora AD. 98

99 Consolidated Financial Statements 32. Provisions In BGN thousand Retirement compensations Warranties Lawsuits Other Total Balance at 1 January Provisions accrued during the year Used provisions (250) (250) - - (500) Balance at 31 December Balance at 1 January Provisions accrued during the year Used provisions (162) (363) - - (525) Other changes Balance at 31 December ,107 Including: Long term Short term Retirement compensations The Group has made an estimate of the retirement compensations due in accordance with the Labor Code and the Collective Labor Contracts, where there are such, on a company by company basis. The provision for retirement compensations is presented as a long term liability in the Group s balance sheet. Warranties The provision for warranties relates mainly to engines sold by Elprom ZEM and shipbuilding contracts of Bulyard Shipbuilding Industry AD. The calculation of the provision is based on estimations based on historical warranty data associated with similar products and services and based on estimates by technical experts. Warranties, expected to be realized in more than 1 year from the balance sheet date, are presented as long-term liabilities. Lawsuits provisions The estimated provision, amounting to BGN 59 thousand relates to lawsuits initiated against companies in the Group. 33. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following items: Assets Liabilities Net In BGN thousand Property, plant and equipment (53) (36) 6,252 6,395 6,199 6,359 Trade and other receivables (42) (100) - - (42) (100) Provisions (24) (27) - - (24) (27) Provision for retirement compensations (50) (38) - - (50) (38) Other payables (147) (151) 2 3 (145) (148) Net tax (assets)/liabilities (316) (352) 6,254 6,398 5,938 6,046 The applicable tax rates used for calculation of the deferred tax assets and liabilities are 10 % for 2008 and

100 Consolidated Financial Statements Movements in timing differences during the year 2008 In BGN thousand Balance Recognised Recognised 1 January 2008 in income in equity Balance 31 December 2008 Property, plant and equipment 6,359 (160) - 6,199 Trade and other receivables (100) 58 - (42) Provisions (27) 3 - (24) Provisions for retirement compensations (38) (12) - (50) Other payables (148) 3 - (145) 6,046 (108) - 5, In BGN thousand Balance Recognised Recognised 1 January 2007 in income in equity Balance 31 December 2007 Property, plant and equipment 1,469 (172) 5,062 6,359 Trade and other receivables (90) (10) - (100) Provisions (35) 8 - (27) Provisions for retirement compensations (41) 3 - (38) Other payables (126) (22) - (148) Recognised tax asset from loss carried-forward from previous periods (41) ,136 (152) 5,062 6, Trade and other payables In BGN thousand Note Trade payables 13,300 17,800 Related party payables Payables to employees 2,423 2,447 Social security due Payables to the state budget 647 1,113 Advance payments received 70,715 54,328 Payables for shareholders, rights sold 19,797 - Other 1, ,444 77, Financial instruments The exposure to credit, interest rate and foreign currency risk arises in the normal course of the Group s business. The Group does not use derivatives to reduce exposure to fluctuations in interest rates. 100

101 Consolidated Financial Statements Credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is: In BGN thousand Cash and cash equivalents 80,569 86,256 Financial assets held for sale - - Trade and other receivables 4,550 11,210 Related party receivables Long-term receivables 1, ,045 98,676 The maximum exposure to credit risk for trade receivables at the reporting date by geographic region is: In BGN thousand Domestic 2,161 2,702 Euro-zone countries Non-Euro zone countries 1,571 8,151 4,550 11,210 Impairment losses The aging of trade receivables at the reporting date is: 31 December December 2007 In BGN thousand In BGN thousand In BGN thousand In BGN thousand Gross amount Impairment Gross amount Impairment Current 2,999-8,913 - Past due days 875-1,590 - Past due days 720 (131) 387 (31) More than 360 days 357 (270) 1,337 (986) 4,951 (401) 12,227 (1,017) The movement in the allowance for impairment in respect of trade receivables during the year was, as follows: 31 December December 2007 In BGN thousand In BGN thousand Impairment at 1 January (1,017) (974) Impairment loss recognized for the year (124) (407) Uncollectible receivables written-off Impairment at 31 December (401) (1,017) 101

102 Consolidated Financial Statements Liquidity risk 31 December 2008 In BGN thousand Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years Non-derivative financial liabilities Loans and borrowings 9,075 (10,135) (2,218) (2,116) (2,237) (3,564) Debenture loan 21,953 (26,846) (866) (866) (1,732) (23,382) Related party payables 316 (316) (316) Trade and other payables 13,300 (13,300) (13,300) Payables for shareholders, rights sold 19,797 (19,797) (19,797) Other payables 1,876 (1,876) (1,876) ,317 (72,270) (38,373) (2,982) (3,969) (26,946) 31 December 2007 In BGN thousand Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years Non-derivative financial liabilities Loans and borrowings 12,285 (12,389) (1,490) (3,536) (1,910) (5,453) Debenture loan and acrued interest 109 (109) (109) Trade and other payables 17,800 (17,800) (17,800) ,194 (30,298) (19,399) (3,536) (1,910) (5,453) Currency risk Exposure to currency risk of the Group at was, as follows: BGN EUR USD JPY BGN EUR USD JPY In BGN thousand 31 December December 2007 Cash and cash equivalents 16,309 52,638 11,622-48,581 21,574 16,101 - Trade and other receivables 4, ,617 3, ,225 Related party receivables Long-term receivables - 1, Loans and borrowings (628) (8,447) - - (1,254) (11,031) - - Debenture loan (21,953) Related party payables (316) (109) Payables for shareholders, rights (19,797) sold Other payables (1,876) Trade and other payables (10,263) (2,196) (328) (513) (9,751) (8,049) - - (33,579) 43,526 11,294 (513) 40,678 6,395 16,184 5,225 Financial instruments denominated in Euro are not exposed to currency risk because of the fixed exchange rate between the Bulgarian lev and the Euro. The following significant exchange rates were applied during the year: Average rate Reporting date spot rate U.S. dollars Japanese yen

103 Consolidated Financial Statements Sensitivity analysis A 10 percent strengthening of the BGN against the following currencies at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for December 2008 In BGN thousand Equity Profit or loss U.S dollars - 1,129 Japanese yen - (51) - 1, December 2007 In BGN thousand Equity Profit or loss U.S dollars - 1,618 Japanese yen ,141 A 10 percent weakening of the BGN against th.e above currencies at 31 December would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. Interest rate risk At the reporting date the interest rate profile of the Group s interest-bearing financial instruments was: In BGN thousand Fixed rate instruments Financial assets 81,621 87,140 Financial liabilities (21,953) - 59,668 87,140 Variable rate instruments Financial assets - - Financial liabilities (9,075) (12,283) (9,075) (12,283) Sensitivity analysis for fixed rate instruments The Group does not hold any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss. Sensitivity analysis for variable rate instruments A change of 1 percent in interest rates at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for December 2008 In BGN thousand Equity Profit and loss Financial assets - - Financial liabilities - (91) 31 December 2007 In BGN thousand Equity Profit and loss Financial assets - - Financial liabilities - (123) 103

104 Consolidated Financial Statements 36. Related parties The Group has controlling related party relationship with its shareholders. The Group also has related party relationship with its associates (refer to note 20) and with its Directors and Executive Officers. Transactions with Directors and Executive Officers In BGN thousand Salaries and social security of the Executive Directors, Management Boards and Supervisory Boards, and Board of Directors 1, , Related party receivables In BGN thousand VIK-Sandvik-IHB Design AD /prepayment for design services/ Dunav Tours AD loan receivable Dunav Tours AD interest receivable Related party payables In BGN thousand VIK-Sandvik-IHB Design AD /liabilities for performed design services/ Other related party transactions Associates The transactions with associates in the year, ended 31 December 2008 are as follows: In BG N thousand Income from services to Dunav Tours AD Interest income from loan extended to Dunav Tours AD Dividends income from Dunav Tours AD Income from sale of materials and services to VIK-Sandvik-IHB Design AD Expenses for design services performed by VIK-Sandvik-IHB Design AD (750) (475) Interest income from Odesos PBM AD (278) 104

105 Consolidated Financial Statements Loans and borrowings Loan granted to Odesos PBM AD Loan repaid from Odesos PBM AD (540) - Loan granted to Dunav Tours AD Loan repaid to Dunav Tours AD (978) Significant subsidiaries Country of Ownership interest incorporation % % Privat Engineering AD Bulgaria Avgusta Mebel AD Bulgaria Hydropower Bulgaria AD Bulgaria ZMM Bulgaria Holding AD Bulgaria ZMM Sliven AD Bulgaria ZMM Nova Zagora AD Bulgaria Leyarmash AD Bulgaria Mashstroy AD Bulgaria Elprom ZEM AD Bulgaria KRZ Port-Burgas AD Bulgaria KLVK AD Bulgaria International Industrial Holding Bulgaria AG Switzerland Maritime Holding AD България Bulgarian Register of Shipping AD България Bulyard AD България Bulyard Shipbuilding Industry AD България Bulkari EAD България Emona Shipping Ltd Malta Martsiana Shipping Ltd Malta IHB Shipping Co EAD Bulgaria Emona Ltd Marshall Islands Karvuna Ltd Marshall Islands Martsiana Ltd Marshall Islands Skitia Ltd Marshall Islands Odria Ltd Marshall Islands

106 Consolidated Financial Statements 37. Subsequent events No events occurred after the balance sheet date which requires adjustments in the annual financial statements for the year ended 31 December Exercised rights sold to shareholders for the amount of BGN 278 thousand has been paid for the period Contingent liabilities In July 2005, Industrial Holding Bulgaria AD secured the issue of bank guarantees from Bank DSK EAD for the amount of EUR 671 thousand to guarantee Elprom ZEM AD s payables to a client. In November 2006, an agreement was made for revolving credit for issuing bank guarantees and working capital funding with a limit of BGN 4,500 thousand. These were secured by a special pledge of KRZ Port-Bourgas AD, a subsidiary of the holding company. As at 31 December 2008, BGN 1,577 thousand and BGN 3,312 thousand are utilized to issue bank guarantees and three letters of credits to Bulyard Shipbuilding Industry AD, respectively. On , the third corporate guarantee issued by Industrial Holding Bulgaria AD in connection with a contract for construction of vessels between Bulyard Shipbuilding Industry EAD and companies Navigation Maritime Bulgare, was terminated. The terminated corporate guarantee amounted to EUR 4,212 thousand and USD 3,595 thousand. The guarantee was issued in connection with the third advance installment for construction of a vessel under construction number 515 and was terminated due to fulfillment of the contract obligations. That was the third and last corporate guarantee, issued by Industrial Holding Bulgaria AD in connection with the above mentioned contract for construction of vessels under construction numbers 516, 457 and 515. The subsidiary Bulyard Shipbuilding Industry EAD has contracts for revolving credits with three commercial banks. Credits are used as collateral for multiple issues of bank guarantees for prepayments related to construction of ship numbers 459 and 101 and for funding of the construction. Credits are collateralised by real estate of Bulyard Shipbuilding Industry EAD and by promissory notes for the amount of each issued bank guarantee and for the working capital used. Promissory notes are issued by Bulyard Shipbuilding Industry EAD and are accepted by the parent company Bulyard AD. As at the Company accepted in favor of banks promissory notes for the amount of EUR 10,971 thousand and USD 28,975 thousand. In relation to credits for working capital funding and investment funding of Bulyard Shipbuilding Industry EAD, Bulyard AD accepted in favor of another two banks promissory notes for the amount of EUR 2,047 thousand. ZMM Bulgaria AD presented guarantees related to credits of its subsidiary ZMM Sliven AD by accepting promissory notes for the total amount of BGN 1,478 thousand. As at , the Company has provided performance guarantees for fulfilling of orders by Elprom ZEM AD for the amount of BGN 1,325 thousand to NEK EAD, VATECH, MAVEL. The Company is also co-obligor to a credit extended by Bank DSK to Leyarmash AD for the amount of BGN 104 thousand and has accepted promissory note for BNG 216 thousand. The Group management does not expect that the promissory notes will be paid and no provisions have been recorded. According to a court decision from 11 July 2007, the Varna Appellate Court resolved that the Central Cooperative Union, Sofia and the Regional Cooperative Union, Shumen are the owners of 13.69% of the non-current assets of Avgusta Mebel AD, Shumen currently owned by the Company. The Company s legal adviser has informed the Company that the decision has been appealed in front of the Supreme Court. The claim was honored on Comparative information In order to provide additional detail on the information in the Cash flow statement, Income statement and the notes to the Financial statements, certain sections of the prior year data have been reclassified and regrouped. 106

107 IHB GOVERNANCE 107

108 Corporate governance In October 2007 the National Corporate Governance Code was adopted. On 26 October 2007 IHB Plc signed a declaration on adoption of the National Corporate Governance Code and will carry out its activity in compliance with its provisions. The document was published by BSE. The compliance with the Code is based on the comply with or explain principle. 108

109 Comply or explain report on the Bulgarian National Corporate Governance Code of October 2008 Industrial Holding Bulgaria PLC Content Intoduction Chapter One CORPORATE BOARDS Two-tier System Chapter Two AUDIT AND INTERNAL CONTROL Chapter Three PROTECTION OF SHAREHOLDERS RIGHTS Chapter Four DISCLOSURE OF INFORMATION Chapter Five CORPORATE GOVERNANCE AND STAKEHOLDERS

110 Introduction Since 2003 IHB prepares a Corporate Governance Program and makes report on the corporate governance activities in its Annual Management Reports since In October 2007 National Corporate Governance Code was accepted in Bulgaria. The Code was accepted by the Bulgarian Stock Exchange-Sofia. BSE-Sofia requires that the companies listed on the Official market should comply with the Code. On 26 October 2007 IHB signed a declaration where IHB states that accepts the National Corporate Governance Code and will make its activities in compliance with its regulations. The compliance of the Code is reported on the comply or explain principle, which means that the Company complies with the Code s recommendations or the management explains the reasons when the activities depart from or do not comply with the recommendations. In this Report information on the applying the recommendations of the Code in IHB corporate governance is presented. The actions of IHB management and employees are in direction of confirming the principles for good corporate governance, increasing the trust of the shareholders, investors and the stockholders and for encouraging the successful business activities of IHB. The IHB management took a decision for developing a new up-to-day corporate governance strategy for IHB in conjunction with the latest international best practices. Now, after the acceptance of the National Corporate Governance Code, IHB will take actions in this direction. 110

111 Comply or explain report Chapter One CORPORATE BOARDS IHB has a two-tier management system. That is why the recommendations for one-tier management system of the Code are not applicable and are excluded from this document. Two-tier System The Management Board and the Supervisory Board jointly act in the interest of all the company shareholders and take into consideration the interests of the company s stakeholders. 1. Management Board 1.1. Functions and Tasks The Management Board manages the company in accordance with the company s visions, goals and strategies established by the Supervisory Board in the best interest of all shareholders. IHB applies this practice The Management Board should implement the strategy of the company in accordance with the directions of the Supervisory Board. IHB applies this practice The Management Board should develop the company s risk management and internal audit policy. It must implement the company s risk management system and report on implementation to the Supervisory Board. IHB applies this practice. In May 2009 the GMS will choose an Audit Committee to the Supervisory Board and it is expected recommendations to be given for developing a state-of-the-art system for risk management and internal audit The Management Board must ensure that the company meets its contractual obligations. IHB applies this practice The Management Board should set up the company s financial information system and ensures it is efficiently working in accordance with the directions set by the Supervisory Board. IHB applies this practice The Management Board should work in cooperation with the Supervisory Board on developing the company s business plan; carrying out extraordinary and material transactions; and implementing any other operations and actions required by the company s bylaws. IHB applies this practice The Management Board must inform and report to the Supervisory Board on its actions. Management Board should provide information in the format and within the established deadlines required by the Supervisory Board. IHB applies this practice During their mandate the members of the Management Board should act in a professional and diligent manner and conduct themselves according to the commonly accepted principles of integrity and duty of care. IHB applies this practice. Management Board should adopt and follow a professional ethical code of conduct. IHB will apply this practice. At present IHB does not have a Code of Ethics Structure and Competence The structure and the number of members on the Management Board should guarantee the effective performance of the company. IHB applies this practice The responsibilities, tasks, duty of care and duty of loyalty of members of the Management Board to the company, as well as the criteria and level of remuneration and the conditions for removal from the Board should be stipulated by contract. IHB applies this practice The required skills, rights and responsibilities of the members of the Management Board must comply with the law and the company s by-laws, and follow good professional standards and practice. IHB applies this practice Remuneration The amount and criteria for the remuneration of the members of the Management Board should in accordance with the law and good corporate governance practices be based on the following criteria: The responsibilities and the contributions of the member of the Management Board to the company s performance and results; The ability to attract, select and retain qualified and loyal managers; The need to have the interests of the members of the Management Board aligned with the long-term interest of the company; 111

112 IHB applies this practice The remuneration of members of the Management Board should consist of two parts: fixed compensation and variable incentives In addition to a fixed compensation, the Company can offer to the Management Board member shares, options on shares, and other appropriate financial instruments The guidelines and procedures for the issue and use of additional incentives to the members of the Management Board are set out in the company by-laws. IHB applies this practice. Until now no shares, share options or other suitable financial instruments have been given to the members of the MB The remuneration of the members of the Board of Directors must be disclosed in accordance with the law and the company s by-laws. Shareholders should have easy access to information concerning the remuneration of Management Board members. IHB applies this practice. Information about the remuneration of the MB is presented in the Annual Report Conflict of Interests The members of the Management Board should prevent any real or potential conflict of interests. IHB applies this practice The procedures for preventing and disclosing conflicts of interests should be provided for in the company s by-laws. IHB applies this practice The members of the Management Board should immediately disclose any conflicts of interests to the Supervisory Board and provide shareholders access to information about transactions concluded between the company and members of the board or any related party. IHB applies this practice Each conflict of interests should be disclosed to the Supervisory Board. IHB applies this practice A potential conflict of interests exists when the company intends to realize a transaction that involves: (à) a party related to or with financial interest linked to a member of the Management Board; (b) Board members that are either members of the Supervisory Board or the Management Board. 2. Supervisory Board 2.1. Functions and Tasks In accordance with the division of functions within the two-tier governance system, the Supervisory Board must appoint the Management Board of the company, provide it with strategic guidance, oversee and control its activities. IHB applies this practice The Supervisory Board should define and oversee the implementation of the vision, goals and strategy of the company. It should provide adequate guidance to the Management Board for implementation. IHB applies this practice The Supervisory Board should provide adequate guidance to the Management Board concerning the effective development and implementation of the company s risk management and internal audit systems and the proper functioning of financial information systems. IHB applies this practice The Supervisory Board must ensure the compliance of the company with legal, normative and contractual obligations, as well as with the rules embedded in the company by-laws. IHB applies this practice In carrying out its tasks, the Supervisory Board should ensure that an effective and proper functioning information exchange system with the Management Board is in place. IHB applies this practice At least once a year the Supervisory Board should evaluate the performance of the Management Board as a whole and the work of each of its individual members. IHB will apply this practice The Supervisory Board must perform its tasks and carry out its obligations in compliance with the law, the company s by-laws and according to the commonly accepted principles of integrity and duty of care. IHB applies this practice Appointment and Removal of Management Board Members The Supervisory Board should appoint and remove the members of the Management Board in compliance with the company s by-laws and in accordance with good corporate governance standards, while 112

113 Comply or explain report respecting the principles of continuity and ensuring the stability of the Management Board s work. IHB applies this practice The compensation policy of the Supervisory Board should guarantee effective performance of the company in the best interest of its shareholders. IHB applies this practice Structure and Competence The members of the Supervisory Board should carry out their tasks independently and impartiality in the best interest of the company. IHB applies this practice.one of the three members of the SB is independent according to the requirements of the Public Offering of securities Act The number of members of the Supervisory Board, including the number of independent members and the proper division of tasks among them, should be provided in the company s by-laws. IHB applies this practice The independent members of the Supervisory Board should be impartial and act in the best interest of the company and all its shareholders. IHB applies this practice The members of the Supervisory Board should have appropriate knowledge and experience to inform the decisions and actions they take. At least one of the members should have financial competences. IHB applies this practice After their election, the new members of the Supervisory Board should attend an induction programme including legal and financial issues related to their task and the company s activities and performance. IHB will apply this practice Continued professional training of members of the Supervisory Board should be encouraged. IHB will apply this practice The members of the Supervisory Board should be able to devote sufficient time to carry out their tasks and duties. The company s by-laws should limit the number of board positions the members of the Supervisory Board is allowed to hold. IHB does not apply this practice. IHB is not able to limit the activities of the members of SB The procedures for selecting new Supervisory Board members should take into account the principles of continuity and ensure the stability of the Supervisory Board s work. IHB applies this practice Remuneration of Members of Supervisory Board The amount and criteria for the remunerations of the members of the Supervisory Board must be approved by the General Meeting of Shareholders. IHB applies this practice The amount and criteria for the remuneration of the members of the Supervisory Board should be based on their responsibilities and contribution but should not be tied to the company s results. IHB applies this practice. The remuneration is a constant monthly payment for each member of the SB The remunerations of Supervisory Board members should be determined so as to reflect their individual participation in Board meetings, their performance level in regard with their assigned tasks, their ability to oversee and control the operations of executive management. Independent directors should not receive any additional remuneration in any form from the company. IHB applies this practice The members of the Supervisory Board should not be compensated for their activity with shares or options. IHB applies this practice The remuneration of the members of the Supervisory Board must be disclosed in accordance with the law and the company s by-laws. Shareholders should have easy access to information concerning the remuneration of Supervisory Board members. IHB applies this practice. Information about the remuneration of the SB is presented in the Annual Report Conflicts of Interests The members of the Supervisory Board should prevent any real or potential conflict of interests. IHB applies this practice The procedures for preventing and disclosing conflicts of interests should be provided for by the company s by-laws. IHB applies this practice The members of the Supervisory Board should immediately disclose any conflicts of interest and provide shareholders access to information about transactions concluded between the company and members of the 113

114 board or any related party. IHB will apply this practice A potential conflict of interests exists when the company intends to realize a transaction that involves: (à) a party related to or with financial interest linked to a member of the Supervisory Board; (b) Board members that are either members of the Supervisory Board or the Management Board Committees The work of the Supervisory Board should be assisted by committees. The Supervisory Board should determine the need for setting up committees in accordance with the specific operations of the company The Supervisory Board should establish at a minimum an audit committee, which should be comprised of independent directors and experts The committees should be set up according to pre-established and adopted written terms of reference which should include the scope, tasks, modalities and reporting procedures of the committee. IHB will apply this practice. Until now no committees have been founded because of lack of such practice in Bulgaria and recommendations for its foundation. In May 2009 the GMS will choose an Audit Committee to the Supervisory Board. Chapter Two AUDIT AND INTERNAL CONTROL 1. In accordance with the established professional standards and requirements, the Board of Directors (in the one tier system) and the Supervisory Board (in the two tier system) should - assisted by the audit committee - present in writing at the General Meeting of Shareholders a motivated proposal for the selection of an external auditor. IHB will apply this practice. Until now the proposal had been motivated orally. 2. The principle of rotation should be applied in selecting and appointing an external auditor. IHB will apply this practice. Each year the Management examines and discusses offers from different auditors and after careful assessment, the best candidate is offered for election to the General Meeting of Shareholders. The auditors are elected for each financial year. 3. The company should set up an internal control system that guarantees effective reporting and disclosure of information. 4. The internal control system should be developed and operate in order to ensure the early identification of any material risks the company may face and to effectively manage those risks. IHB has a system for internal control which is constantly improved according to the legislation requirements and the best practices. In May 2009 the GMS will choose an Audit Committee to the Supervisory Board and it is expected recommendations to be given for developing a state-of-the-art system for risk management and internal audit Chapter Three PROTECTION OF SHAREHOLDERS RIGHTS 1. Protection of Shareholders Rights The Board of Directors or the Supervisory Board should ensure the equitable treatment of all shareholders, including minority and foreign shareholders, and should be responsible for the protection of their rights. IHB applies this practice. 2. General Meeting of Shareholders 2.1. All shareholders must be able to participate in the General Meeting of Shareholder and to express their opinion. IHB applies this practice Shareholders who have the right to vote should have the opportunity to exercise their voting rights through the use of a proxy at the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board should exercise effective oversight and ensure that necessary arrangements are made for the voting by authorised representatives (proxies) in accordance with the instructions of the shareholders and in accordance with the law. IHB applies this practice The Board of Directors or the Supervisory Board must establish rules for the organisation and conduct of regular and extraordinary General Meeting of Shareholders. These rules must guarantee the equitable treatment of all shareholders and the right of each shareholder to express his/her opinion about the items on the agenda of the General Meeting of Shareholders. 114

115 Comply or explain report IHB applies this practice The Board of Directors or the Supervisory Board should establish the rules and procedures for the conduct of the General Meeting of Shareholders in a manner which does not make voting procedure unnecessarily difficult or expensive. IHB applies this practice The Board of Directors or the Supervisory Board should take action to encourage the participation of all shareholders at the General Meeting, including those who cannot make it physically by allowing the use of information technology (including Internet) when ever possible and necessary, and in accordance with item of the present Code. IHB will apply this practice when there is a legislative requirement and a safe and reliable technical opportunity All members of the Board should attend the General Meeting of Shareholders. IHB applies this practice The preparation of written materials for the General Meeting of Shareholders should comply with the following: Documentation and reference materials related to the agenda of the General Meeting of Shareholders must be clear, accurate and to the point in order not to mislead the shareholders. All proposals concerning the major corporate events should be presented as separate items on the agenda of the General Meeting of Shareholders, including the proposal for the distribution of dividends. IHB applies this practice The company should maintain a special section on its website describing the rights of shareholders and the rules and procedures for their participation in the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board should ensure court-authorized shareholders [shareholders with 5% or more shares] can place additional items on the agenda of the General Meeting of Shareholders. IHB applies this practice The Board of Directors or the Supervisory Board must guarantee the right of all shareholders to be informed on a timely basis about the decisions that have been made at the General Meeting of Shareholders. IHB applies this practice. Chapter Four DISCLOSURE OF INFORMATION 1. The Board of Directors or the Supervisory Board must establish the company s information disclosure policy in compliance with legal requirements and the company s by-laws. IHB applies this practice. 2. In accordance with established policies, the Board of Directors or the Supervisory Board oversee the implantation and ensure proper support for an effective system for disclosure of information. IHB applies this practice. 3. The system for disclosure of information should guarantee equal access to information to shareholders, investors, and other stakeholders and should not allow for any abuse of internal information or insider trading. IHB applies this practice. 4. The Board of Directors or the Supervisory Board should guarantee that the system for information disclosure provide for comprehensive, timely, true and understandable information to allow for objective and well-informed decision making and assessments. IHB applies this practice. 5. The Board of Directors or the Supervisory Board should establish internal rules for the production and dissemination of mid-term and annual reports. The Board of Directors or the Supervisory Board should ensure that these rules are implemented and should oversee the proper disclosure of the information in a way that guarantees compliance with provision # 3 of this chapter. IHB applies this practice. 6. As a part of a well functioning system for the disclosure of information, the Company should to set up and maintain a company website. This website should be operated in accordance with approved policies on the content, scope and regularity of information disclosure. The official information posted on the website should include at minimum: Information about the company Information about the joint-stock structure The company s by-laws Information about the governing bodies Financial reports covering at least the previous 3 years Materials for upcoming General Meeting of Share- 115

116 holders Minutes of the General Meeting of Shareholders of the last 3 years Information about external auditors Information about up-coming corporate events Any information that is material to the company s activities IHB applies this practice. The whole information about IHB and its current development is published in Bulgarian and in English on its website: com 7. The company should regularly disclose information about its corporate governance. The disclosure of corporate governance information should state the company s level of compliance with the present Code in accordance with the comply or explain principle. This principle requires companies to comply with the recommendations of the present Code or to explain the reasons for not complying with individual provisions of the Code. IHB applies this practice since Chapter Five CORPORATE GOVERN- ANCE AND STAKEHOLD- ERS company and the interests of the economic, social and ecological environment in which the company operates. IHB will apply this practice. 4. The Board of Directors or the Supervisory Board should support effective stakeholder participation in accordance with the law and international good practices in matters of non-financial information disclosure and reporting. The company should disclose information about economic, social and environmental issues of concern to stakeholders, for example: anti-corruption policies; labor policies, policies regulating supplier and client relations; the company s corporate social responsibility policies; environmental protections and nature preservation policies. IHB applies this practice. Since 2005 IHB makes a Corporate Social Responsibility Report. The Report is prepared in accordance with the best international practices for reporting the company s corporate social responsibility and is part of the Annual Consolidated Report. IHB is the first listed company in Bulgaria which started to prepare and publish CSR report. 1. Corporate governance should ensure effective interaction with the company s stakeholders. To this category fall certain interested parties and groups of individuals who are directly influenced by the company and who influence and/or are in a position to influence the company, including for example: suppliers, clients, employees, creditors, civil society groups, and others. The company should identify the stakeholders who are interested in its activities, on the base of their scale and sphere of influence and impact, as well as their role and relationship to sustainable development. IHB applies this practice. 2. The company s stakeholder policy must be in compliance with existing laws. Good corporate governance practices should require taking into consideration the interests of stakeholders in accordance with the principles of transparency, accountability and business ethics. IHB applies this practice. 3. The Board of Directors or the Supervisory Board should establish specific rules for addressing the interests of stakeholders. These rules should ensure appropriate stakeholder engagement when decisions requiring their input are made. These rules should also balance the interests of the 116

117 Information about the members of the MB and the SB Information about the members of the Management Board and the Supervisory Board In 2008, no change in the composition of the Management Board and Supervisory Board occurred. In December 2008, Angel Katsarov, Member of the Management Board and Executive Director of IHB, died and IHB lost a highly respected leader and professional, having an exclusive contribution to the development of the Bulgarian machine building over the last ten years and recognition of IHB as a significant organization in the economic circles in Bulgaria. In February 2009, Georgi Momchilov was elected Member of the Management Board and Executive Director of IHB and assigned with the functions of Angel Katsarov. By virtue of Decision No , the following changes have been made in the data of IHB entered into the Commercial Register at the Registry Agency: Deletion of Angel Stoyanov Katsarov as Member of the Management Board, Executive Director and Representative of the Company due to death; Registration of Georgi Yanchev Momchilov in his place, as Member of the Management Board; Registration of Daneta Angelova Zheleva as Chief Executive Director; Registration of Georgi Yanchev Momchilov as Executive Director; The Company is represented by Daneta Angelova Zheleva and Georgi Yanchev Momchilov, jointly or severally. Information about participation in trading companies of the members of the boards as unlimited liability partners, holdings of over 25% of the capital of other companies or participation in the management of other companies or cooperatives as procurators, managers or board members: Contracts under Article 240b of the Law on Commerce signed in 2008 The Company signed no contracts with the members of the Board of Directors or their related parties, which are out of its usual operations or materially deviates from market conditions. Remunerations paid to the members of the Management Board and the Supervisory Board Members of the Supervisory Board DZH AD, through Representative Elena Kircheva Snezhana Hristova Konstantin Zografov Members of the Management Board Bozhidar Danev Daneta Zheleva Angel Katsarov Borislav Gavrilov Boyko Noev Remunerations received in 2008 /BGN/ From IHB From IHB subsidiaries The remunerations received by the members of the Management Board and the Supervisory Board of IHB include cash amounts only. The members of the Boards received no non-monetary benefits, contingent or deferred remuneration. IHB and its subsidiaries do not owe the members of the Boards any amounts for pensions, pension compensations or other similar benefits. The 2008 total amount of social security contributions paid by IHB in favour of the members of the Management Board and the Supervisory Board, including obligatory pension insurance contributions, is BGN The members of the Boards received no non-monetary benefits, contingent or deferred remunerations. IHB and its subsidiaries owe no pension, pension compensations or other similar benefits to the members. IHB and its subsidiaries do not set aside or accrue other amounts for pensions, pension compensations or other similar benefits. Information about the shares held by the members of the Supervisory Board and the Management Board of IHB as at 31 December 2008: Members of the Supervisory Board Acquired in 2008 Transferred in 2008 Number of shares held directly Number of shares held through related parties Total number of shares held directly and through related parties % of the votes in the General Meeting of Shareholders, directly and through related parties DZH AD Snezhana Hristova Konstantin Zografov Members of the % 0.079% 0.002% Management Board Bozhidar Danev Daneta Zheleva Angel Katsarov Borislav Gavrilov Boyko Noev % 5.64% 0.005% 0.002% 0 117

118 ACTIVITY REPORT BY THE INVESTOR RELATIONS DIRECTOR OF INDUSTRIAL HOLDING BULGARIA PLC FOR 2008 Bogomila Hristova, Investor Relations Director Dear Shareholders, The 2008 world economy fluctuations, which we witnessed, affected the capital market and the prices of shares of all public companies. The uncertainty, lack of fresh cash and negative expectations resulted in investors withdrawal from the market through mass wholesales of shares. In 2008, the shares of IHB shares became again one of the most liquid positions on the Bulgarian Stock Exchange /BSE/ among the shares of 350 companies, which is also a reason for the higher fall in their price. Investor relations of IHB in 2008 In 2008, IHB continued the good policy in its investor relations. The effective communication between IHB and its investors, the regulatory authorities, the stock exchange, the Central Depository and the media has been always the main objective of this activity. The communication success is measured by the reputation in the circles of the investors society and we are glad to announce that IHB enjoys a very good reputation. The positive assessment by the investors society is also supported by the fact that IHB has always been named as an example for good public company. The activity in 2008, as well as in the last several years, was mainly related to: Maintenance of effective communication with the investors society Provision of sufficient information on the activity of IHB Organization of sessions of the General Meeting of Shareholders Administrative support and cooperation to the shareholders 118

119 Investor Relations Director`s report Assistance to the managing bodies in their functions performance Maintenance of effective communication within the Group of IHB Effective communication with the investors society We, at IHB, have always tried to maintain effective communication with the investors and investors society and considered it a two-way exchange of information - from IHB to the investors society and vice versa. We respect the opinion of the investors society about us and seek to receive feedback so as we may adequately act in the market. We used the latest means in the field to achieve effective communication - printed annual reports, website, meetings with investors and financial analysts and maintenance of good relations with the media. The information about IHB - thorough, accessible and provided in due time In 2008, we continued to traditionally provide detailed information in the activity reports and share price sensitive information (the so-called ad hoc information). All regular reports of the Company required under the Law on Public Offering of Securities and the legislative acts on its implementation, i. e. quarterly and annual reports and consolidated quarterly and annual reports, were presented in due time. The reports were prepared so as precise and reliable information on the Company may be provided and full compliance with the applicable legal provisions may be ensured. All reports were published on the website of IHB immediately upon their publishing in the bulletins of Investor.BG and the Financial Supervision Commission /FSC/. In 2008, we established the practice of sending of messages containing sensitive information /IR releases/ to investors by following their publication on the website of IHB. The reports were published in English in short terms. The 2007 Consolidated Annual Report of IHB was published in English in June Traditionally, it was prepared in compliance with the best international practices and the latest trends in the sphere of annual closure and it, once again, enjoyed a high evaluation. Information about the events related to the activity of IHB and the Group s companies, considered sensitive to share price, was provided within the legal terms on regular basis. The legal framework regarding the activities of public companies and information disclosure is constantly followed up and the new provisions are complied with. 119

120 Organization of the General Meeting of Shareholders The regular annual session of the General Meeting of Shareholders of IHB was held on 30 June The General Meeting of Shareholders approved the Consolidated and Unconsolidated Activity Reports, the Registered Auditor s Report and the Financial Statements for 2007, exempted the members of the Management and Supervisory Boards from responsibility for their activities in 2007, voted the remunerations of the members of the Supervisory Board, elected KPMG Bulgaria a registered auditor for 2008, distributed the 2007 profit of IHB and made a decision on issue of convertible bonds. Following all statutory procedures, on 24 October 2008, the subscription of the 2008 issue of shares of IHB was successfully closed and a debenture loan of BGN was concluded. On 20 November 2008, the first session of the General Meeting of Bondholders was held and Strahil Nikolov Vidinov was elected their representative. Always at shareholders disposal IHB maintains loyal relations with its shareholders through due notification and assistance in relation to certain issues and problems. In 2008, the interest and inquiries on behalf of institutional investors, financial analysts and financial media continued. Investors were mainly interested in the risks faced by the companies within the IHB Group. In 2008, there were held meetings with the investors on their initiative or on the initiative of financial analysts and brokers and on the initiative of IHB in relation to the issue of convertible bonds. The meetings between professional and institutional investors and analysts and the Management aimed at presentation of information on the activities of the companies within the Group and the results of IHB, the risks facing the businesses of the companies and the issue of convertible bonds. The interest on behalf of small investors remained almost unchanged as compared to the preceding year and most of the issues raised were about the dividend distribution, the share trading, the decisions made by the General Meeting, the results and activity of IHB and the issue of bonds. IHB maintains good relations with the media and always gives detailed responses to their inquiries. I am glad to say that IHB is assessed by the investors society and the media as one of the most transparent and accessible public companies in Bulgaria. Administrative support to the managing bodies In 2008, all sessions of the Management and Supervisory Boards were convened in compliance with the applicable legal provisions and the internal rules and regulations of the Holding. The invitations, containing the agendas and accompanied by relevant materials, were 120

121 Investor Relations Director`s report sent to all members in due time. The session minutes taken are duly kept. Cooperation for good corporate governance In 2008, as usual, the Investor Relations Director assisted in the realization of the objectives and tasks of the Good Corporate Governance Program of IHB and provided support to the Management of the Holding in the realization of most events envisaged under the Program for Effective communication within the IHB Group The communication process accompanying the investor relations also includes exchange of information within the Group. One of my duties, in the capacity of Investor Relations Director, is ensuring an optimal information flow from the subsidiaries of IHB to IHB regarding the regular and ad hoc information on their activities. The organization and control of the information flow is still a great challenge with a view to provision of share price sensitive information by IHB to the society, FSC and BSE firstly and prevention of information outflow from the subsidiaries. This activity requires constant improvement and will remain a priority in 2009 in consideration of the ongoing introduction of higher requirements to information disclosure as well. I would like to thank all Members of the Managing and Supervisory bodies, the Executive Directors and all Colleagues who contribute to the implementation of the loyal and effective investor relations policy Outlook The activity related to investor relations will be directed at maintenance of honest relations with the investors society and be kept in full compliance with the best and latest international practices in the sphere of investor relations. April 2009 Bogomila Hristova Investor Relations Director 121

122 IHB TEAM Bogomila Hristova Investor Relations Director Nelly Kercheva Head of Financial Analyses and Investment Projects Georgi Yankov Innovation and technology Zlatomir Dimitrov Cheef legal advisor Gergana Atanasova Expert Financial Analyses and Investment Projects Toshka Vassileva Chief Accountant 122

123 IHB team Eli Tuechka Accountant Zlatka Ganeva Office manager Rositza Nikolova Accountant Ivelin Georgiev Construction Director Kristian Velikov Expert Administration and Logistics Galina Deneva Head of Internal audit department 123